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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.
Career Development in General
Most professions and careers develop along the same lines.
Career Development for Traders
How it is now:
A trading model is a plan of action for the trader. It may be explicit as in
a moving average crossover breakout or as intuitive as pattern recognition.
An auction market model is the result of a three step strategy development
process. These are Market Strategy, Trader Strategy and a synthesis of the
two, the Working Strategy.
Learning to Trade
The Steps:
A Trading Plan Case Study
Trading Plan Case Study: A Second Chance
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
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 the LDB volVaU and volVaL.
Everyone knows that demand can shift within a day. After all, that is exactly
what the daytrader seeks. Auction Market analysis provides the details of the
shifting. The lesson to be drawn is that when a demand shift takes place
within a day, simple formulations of value like either the profile or the LDB
must be augmented by analyzing the situation, the market's behavior. This
merely reinforces my message in ref1 and ref2 to: "Understand your markets".
In this case, the two auction market displays, Market Profile and Liquidity
Data Bank, provide enough information to make a determination.
Evaluating Trading Opportunity the Next Day
We can look at daytrading opportunities on June 12 by supposing that we
would trade on any breakout from a value area. As will be seen, only the
volume lower value area limit, volVaL, will be within range.
The two value area determinations are:
VaU POC VaL
Market Profile 104020 103480 102510
LDB volume 103500 101400 101210
We will define a trading opportunity as a simple breakout from an upper or
lower value area. For example, price moving down through volVaL, the volume
lower value area limit (101210), is a breakout and hence a trading opportunity.
A Market Profile type map of S&P June 02 market activity on June 12 is in
figure 3. The only VaU or VaL for either Market Profile or LDB within the
day's trading range is volVaL, marked on the right of the profile half-hour
bars at 101210. Breakout (downside) for the volVaL at 101200 is marked with
a horizontal line.
MARKET PROFILE* REPORT FOR 06 12 02
AND SEGMENTED AUCTION
COMMODITY -- S&P 500 (CME-IOM) JUN 02
Price Brackets Segmented Auction
102280 N N
102250 N N
102200 N N
102150 N N
102100 NP N P
102050 NP N P
102000 NP N P
101950 CNP C N P
101900 CDIN C D | I N
101850 BCDIJN B |C |D | | |I |J | |N |
101800 BCDIJN B |C |D | | |I |J | | |N |
101750 BCDIJKN B |C |D | | | | |I |J |K | | |N |
101700 BCDIJKMN |B |C |D | | | | |I |J |K | |M |N |
101650 BCDIJKMN |B |C |D | | | | |I |J |K | |M |N |
101600 BCDIJKMN |B |C |D | | | | |I |J |K | |M |N |
101550 BCDEIJKMN |B |C |D |E | | | |I |J |K | |M |N |
101500 BCDEIJKLM |B |C |D |E | | | |I |J |K |L |M | |
101450 BCDEIJKLM |B |C |D |E | | | |I |J |K |L |M | |
101400 BCDEIJKLM |B |C |D |E | | | |I |J |K |L |M | |
101350 BDEFIJKLM |B D |E |F | | |I |J |K |L |M | |
101300 BDEFIJKLM |B D |E |F | | |I |J |K |L |M | |
101250 BDEFIKLM |B D |E |F | | |I | |K |L |M | | <== volVaL/Yst
101200 BDEFIKLM |B D |E |F | | |I | |K |L |M | | 101210
-------------------------------------------------------------------------------
101150 BEFIKLM B E |F | | |I | |K |L |M | | Breakout Price
101100 BEFIKLM B E |F | | |I | |K |L |M | | 101200
101050 BEFIKL B E |F | | |I | |K |L | | |
101000 EFIKL E F | |I K |L
100950 EFIKL E F | I K L
100900 EFHIKL E F H I K L
100850 FHL F H L
100800 FH F H
100750 FH F H
100700 FGH F G H
100650 FGH F G H
100600 FGH F G H
100550 FGH F G H
100500 FGH F G H
100450 FGH F G H
100400 FGH F G H
100350 G G
100300 G G
100250 G G
Trading Opportunities for June 12
Time Price Time Price Opportunity
Break out down B 0836 101200 to 0838 101060 140
D 0959 101200 to 1003 100900 300
F 1033 101200 to 1102 100250 950
K 1318 101200 to 1326 100870 330
M 1401 101200 to 1405 101100 100
Opportunity units: 100 = $250
Figure 3. Trading opportunities on downside breakouts from the
lower volume value area. All 'odd' prices have been removed.
Legend: Column 1 = Price, Column 2 = Market
Profile. Columns 3-16 are half-hour trading ranges (B = 8:30 to 9 AM,
C = 9 to 9:30, D = 9:30 to 10, and so on). Associated with the
half-hour bars are the value areas (vertical solid bars) as they
develop through the day.
The day's trading opportunities are posted below the profile. The
first time-price pair is the downwards crossover of price as it triggers
a short at 101200 (volVaL = 101210). The second time-price pair
is the time and price of the lowest price reached in the move.
The Opportunity column is the maximum potential of the move.
The June 11 case illustrates one of several situations that can arise if
you use the wrong value area. The Market Profile value area was completely
out of range for June 12 trading. You would have had no trading signals for
the day. Volume value area, reflecting the intra-day value change on June
11, gave you five daytrading opportunities on June 12. Price passed down
through the lower volume value area five times. Using the correct market
knowledge does offer an edge.
How often do these value area disparities arise? Here are statistics
covering S&P for the June 2002 contract.
Number of trading days: 67
Largest difference between the TPO and volume POC: 2080 ($5200)
Smallest difference between the TPO and volume POC: 0
Average difference between the TPO and volume POC: 281 ($702)
Number days with average or less change in value: 44
Number of days with a large change in value: 21
Number of days unresolved: 2
Average difference between the POCs: 650 ($1625)
Number days volume value area is correct: 17
Number days Market Profile value area is correct: 4
Table 1. Statistics for Point of Control (POC) for S&P, June 2002 delivery.
Validation
The trader who only has access to Market Profiles knows the data will be
incorrect about one-third of the time. If you are one of those, you can
improve your understanding of your data by examining the profile shape as
we did above. If you see a distinct late in the day progression away from
your value area, beware. In that case, although you might not know the
correct value area, you would certainly have enough information to distrust
the profile value area you do have.
The market on June 11 has a lot of back and forth trading early in the day
with heavy volume later on. The LDB value area specified the correct
support/resistance prices. Imagine just the opposite situation: heavy volume
early on, value movement away from that price level, with the profile being
built over the rest of the day. Now the Market Profile support/resistance
prices will be the correct ones. Smaller value shifts during the day can
create an overlap of the two value areas. When the situation is not clear
cut, one may be unable to find the 'right' support/resistance prices. The
statistics in Table 1. lists two such cases.
Footnote:
A number of years ago I did a study of Market Profile value area versus
volume value area (ref4). My conclusion was that there was little
difference between the two. Times have changed.
Ref1 Technical Analysis of Stocks & Commodities, June 2002, pg 22
Ref2 Technical Analysis of Stocks & Commodities, July 2002, pg 32
Ref3 http://www.cisco-futures.com
Ref4 Market Logic School Alumni Letter, April 1987
------------------------------------------------------------------------
Trader's career development does not follow the pattern found in
other professions. Trading has no set body of knowledge, no licensing
facility, no controlling professional organization. Traders just grow.
Unlike doctors, lawyers, engineers, physicists, brick layers and most other
career paths; traders have no basic field of knowledge to master. It is
very much a "do it yourself" endeavor. Most fail.
There is hope. A number of years ago, Peter Steidlmayer devised the Market
Profile (MP). For the first time, traders could analyze value, instead of
price. His work paved the way for other advances in market analysis.
Auction Market Theory, a recent development, lays down the principles
governing auction markets. The first steps have thus been taken to more
align trader development with other career paths.
In the Career Development discussion below trader's careers are compared
with the norm. On the one hand there is the "How it is now" path currently
followed by traders, on the other hand is the "How it should be" path.
Comments on how MD's develop are thrown in as a guide.
1) The introductory learning phase introduces the basic definitions of
the field. These are the college years or the trade school. MD's are in
medical school.
2) In the apprentice phase the trainee applies "school" knowledge.
Ones first job. MD's are doing their internships and residencies.
3) The apprentice grows into a professional. One "learns the business":
The field starts to come into focus. An MD is finishing up residency or
beginning a specialty.
4) Now a professional, the individual "learns the tricks of the trade".
Synthesis is starting to occur; reality and theory are melding. Sometimes it
is back to the books, maybe for an MBA. The MD is in practice.
5) The practitioner has mastered the field and can innovate new developments.
The MD is now a noted contributor, a teacher.
1) The new trader seeks books and magazine articles, attempting to build
a knowledge base. This is frustrating. Every place one turns, there is
different advice. Buys a trading model.
HOW IT SHOULD BE:
1) The trader-to-be should study Auction Market Theory. Learn the basics
of markets, how they work. Available at the CISCO website under "Whats New".
Also in Stocks & Commodities, June/July 2002.
How it is now:
2) Apprenticeship often begins with starting trading, usually with
disasterous results. That trading model did not work. The trader is trying
to do in his field what it took the MD four years of medical school and at
least a year of internship. Looks at other trading models. Goes to an
expensive two or three day trading seminar.
HOW IT SHOULD BE:
2) Auction Market Theory apprenticeship starts via "paper" trading.
CISCO's Short Course is an organized introduction to the field--
market principles are developed into 'reference points', elements of market
information tied to value and demand. Basic training model defines
balanced/unbalanced market types, the first important reference point.
Market behavior is learned via paper trading. The budding trader learns how
to evaluate value, risk and opportunity. Survival (risk control) is the
key concept.
How it is now:
3) The few survivors have developed a healthy skepticism of the claims
bandied about in the literature. They combine techniques of reading
markets; joining chart reading with technical analysis and a 'feel' for
market behavior (Brett Steenbarger's pattern recognition). Judgement develops
on the basis of experience.
HOW IT SHOULD BE:
3) Entry into trading the real world. Techniques and strategies found
in phase 2) are put into action. Strategy comes from understanding and
analyzing a market. One's own trading model is a result of this knowledge.
Feedback from real-world trading is synthesized with Auction Market Theory.
Trading techniques are honed.
How it is now:
4) Some interchange occurs with other successful traders, but for
the most part a trader with a successful method will not share the details.
No professional level Journal or reporting structure exists for traders.
A few traders will maintain professional growth internally and become masters.
Unlike the MD, there is virtually no general knowledge base for support.
Of course, the trader has developed survival skills: do not listen to
brokers, do not run with the pack, do not overtrade and such like.
HOW IT SHOULD BE:
4) The trader goes beyond the basic principles. New trading concepts are
generated and tested. One's personal experience is factored in. Trading
risk is reduced. Trading opportunity expands. Skills are sharpened.
How it is now:
5) The master is normally quite busy in keeping up with market change.
Unlike the MD, who builds on past knowledge and discoveries (both his and
those of others), the master trader is on his own, sink or swim, as the market
evolves. Contemporaries are few. Most of the advertised trainers are not
masters, but rather hacks who capitalize on the widespread lack of market
understanding.
HOW IT SHOULD BE:
5) As a master in the field, the trader has many options. One direction
is to expand the business, trading for others. This could involve mentoring
staff members. Or one could change the goals--seeking fewer trades with
bigger opportunity, with less time in the market. The master is in control.
------------------------------------------------------------------------------
Strategies, Models and Auction Market Trading
Donald L. Jones
May 11, 2002
Market Strategy is determined by the market itself, by the
characterisics that define it. It may be a short timeframe market with
a lot of action packed into minutes or even seconds, like the indexes. Or, it
may be a longer timeframe, more sedate market like the grains.
An auction market study of a market reveals that market's behavior, its
condition, and hence the strategy one must employ trading it.
Secondly, the trader has characteristics and preferences; timeframe, risk,
markets to trade, account size and so forth. These go to make Trader
Strategy. Traders control their Trader Strategy, but Market Strategy
is what the market offers.
Working Strategy is a synthesis of Market Strategy and Trader Strategy.
One's plan, or model comes from the Working Strategy.
Market Strategy
Traders want to catch a trend and ride it to congestion. This happens only
under the right conditions. The market must cooperate, offering opportunity.
The trader must understand the market well enough to know when it is in or
approaching a cooperative mode. A market's condition describes for you it's
reference points. These are the measuring sticks, each telling something
about a particular market feature. Reference points show the phase of the
market (balance, trend or transitional), its current risk, its historic risk,
its value, the volatility (and how it is changing), volume (and how it is
changing), the behavior of the commercial traders and
a number of others. More advanced analysis in the Advice Engine Package
examines the trading potential of the current market in absolute terms.
Reference points are like the pieces of a jig-saw puzzle. Combining the parts
describes the market. Putting the parts together makes the Market Strategy.
A typical Market Strategy for a market in balance would specify entry points,
risk, internal trends, current value and its center, commercial traders behavior,
trading range compared to the norm, shape of the price-volume bell curve,
recent behavior of the market and any trends in volume and volatility. Market
Strategy provides a market-based plan of trade entry, i.e. where the market
offers opportunity.
Examining the same market after it has begun to trend alters the focus.
Many of the same reference points are still important (commercials, volume,
volatility, value and the like). But now congestion governs. Has the
trading range become limited? Is the price-volume curve bunching?. Have
the commercials capped the trend? Is volatility dropping? Is volume easing?
Market Strategy is now the search for clues for a transition to congestion.
Trader Strategy
Trader Strategy is based on the trader's situation and requirements. It may
overrule market startegy. For instance, a market may still be showing trend,
but if the trader meets a target, an exit will be taken anyway. Or a timeframe
may be set (exit no later than 15 minutes before the close). Or a risk
limit may be different from that found in the Market Strategy. Trader
Strategy adds the imprint of the trader to the overall trading methodology.
Working Strategy
Working Strategy is a combination of Market Strategy and Trader Strategy.
Market Strategy undergoes large changes on a daily basis.
Trader Strategy is less
variable. One picks markets to trade, risks to take, hours to work, etc.
That strategy changes when a trader changes (e.g. trade DJ indexes instead
of SP's) or broadens the base of trading from one future to several.
A Working Strategy is unique to the trader. No one else will have the
personal input even if they start with the identical Market Strategy.
Trading Plan/Model
Models arise from the Working Strategy. They are intimately related to the
trader. A model is a codification of procedures the trader has found that work.
It includes the elements of market analysis in the Market Strategy, the
preferences and idiosyncrasies of the trader and the knowledge gained by the
trader from actual trading. As in any successful business, a successful trader
develops a 'feel'. This is not magic. It is experience. Much of it comes
from making mistakes and learning from them. Another part is from observing
markets in many conditions and seeing what follows. While intangible, 'feel'
is a very real part of developing and trading a model.
The path from Market Strategy to Trader Strategy to Working Strategy and
finally to a trading plan/model is the "trading equation". Mathematically it is
Market Strategy + Trader Strategy = Working Strategy ==> Trading Plan/Model.
The trading equation is a strong argument against purchasing a commercially
available trading model. Such a model cannot fulfill the trading equation,
since it cannot include the trader's strategy. A trader is forced to have
a trader strategy because it fits his/her particular situation.
Commentators on technical analysis regularly point out that people who
purchase models do not follow them. The purchased model is only a part
of the equation.
In the Beginning...
Beginners in most professional fields start with a course of instruction.
Following the instruction/introduction phase, there is an apprenticeship.
A successful apprenticeship leads to "journeyman" status, where the individual
becomes a member of the professional community, making a living from his/her
efforts. Some few rise higher, becoming masters; teachers, innovators, gurus.
The standards developed by most professions do not exist for traders.
There are no auction market schools. There are no organized apprenticeship
programs for auction market traders. The beginner, convinced of the potential
benefits of trading, is on his own. He/she reads magazines, books and gets
ideas from the internet and other traders. Inevitably the search for
understanding leads to a perceived need for a "model". There are many models
in books, magazines and explained in weekend seminars. Such models address
the 'Market Strategy' part of the trading equation and at best provide only
a partial answer. Most (all?) of
the 'sure fire' models do not work. Unfortunately, the beginner does not
realize that "a model that works" is worth it's weight in gold and no one would
sell such a valuable commodity.
Technical Analysis: A Bum Steer
The path of least resistance for the beginner is technical analysis. It is
offered and discussed widely. Methods for calculating market 'indicators' are
prevalent. At best, technical analysis deals only with first part of the
'trading equation', i.e., with the Market Strategy, leading to a "model".
Widely used, to little apparent avail, technical analysis plays a prominent
role for many in getting started in trading (see Trading as a Career, on the
CISCO Futures website). Learning to calculate a moving average or oscillator
is hardly the answer when one does not understand the market.
What Path to Take?
Lacking formal educational facilities, the career path for traders, is not
well defined. It is certainly clear that one must understand markets well
enough to divine the Market Strategy for that market at that point in time.
It is equally clear that one must define one's own strategy, which operates
within what the market offers. Only then can a reasonable trading plan be
developed. How can one find the market's strategy? And then one's own
strategy? And then a plan. One set of steps follow.
1) Learn market structure. Learn the foundation principles of markets.
2) Learn to 'read' markets; which ones offer opportunity and at what risk.
Application of market principles leads to Market Strategy.
3) Define one's strategy: time frame?, activity level?, maximum risk? reward?
This knowledge provides Trader Strategy.
4) Synthesize Market Strategy and Trader Strategy into a Working Strategy.
The Working Strategy is the trader's plan of attack.
5) Find the market details, the current 'reference points'.
Integrating the current reference points into one's Working Strategy
becomes one's trading plan. The strategy now has numbers, a guide
to action.
Step 1. Market Principles: Auction Market Theory
Auction market principles are found in Auction Market Theory. An abbreviated
version of the theory is published in Stocks & Commodities, June/July 2002.
A more complete version is on the CISCO website, under "Whats New". Theory
provides the framework for analysis--those principles to follow. Theory
shows the trader what to look for in a market. Once the market is defined,
theory positions one to find a market based strategy.
Theory guides the trader in dissecting the market. As a result, a trader gains
an understanding of opportunity offered by the market and the risk inherent in
that market at that point (say the end of a market day). These variables
change with time, often within 24 hours or less.
Suggested Reading
Go to http://www.cisco-futures.com. Click on "Whats New" on the left sidebar.
Read 'Trading as a Career'
Study 'Auction Market Theory'
Step 2. Market Strategy: Applying Auction Market Principles
Market Strategy comes from a market's current condition. For example, if a market is
in balance, the upper and lower breakout prices are known. The balance range
is known. Price exceeding the upper or lower limit is a 'breakout', an alert
for the beginning of a trend. Also known are the balance 'value area' and 'point
of control'. Breakouts from balance give an 'opportunity' measure which
permits a cataloging of that market's potential for trading. The balance
range can be translated into a risk measure. Trading points are developed from
limits and value areas. Overall trading potential comes from the opportunity
/risk ratio (reward-to-risk ratio). Markets can be compared by their reward-to
-risk ratios. Those with a currently too low reward-to-risk ratio would not be
traded.
If the market condition is not balanced, less is specified by the market parameters.
It is generally more risky to trade. If a clear trend is in place the day
trader knows to go with the trend. The long term trader who did not get in
near the breakout has missed the lower risk trade. Playing 'catch up' is a
much higher risk strategy.
Regardless of outlook, the auction market trader has information that
illuminates the market, aiding in action decisions. Still, the trader
must keep in mind that there are only two
goals: get into a trend early, exit when the trend begins congesting.
The market will tell you it's condition, volume path, volatility path,
commercial behavior, congestion, member's intentions, tradeability, etc.
Market information sets a strategy unique to this market at this time:
A balanced market will breakout at some point in time.
A trending market will always come back into congestion.
The market may be distributing (moving) or congesting--Auction market analysis
tells which.
Members intentions (commercial capping) are on the Visual Graphic.
Tradeability overall comes from Advice Engine studies.
Ditto for reward to risk ratios.
Learning to Develop Market Strategy
Becoming familiar with auction markets and the data is a first step
to incorporating these concepts into one's trading. The CISCO website
has a wealth of information at http://www.cisco-futures.com. Data from
these sources are used in the 'Trading Plan Case Study' below.
On left sidebar, scroll down to the section "Background". Click on 'Value
Based Power Trading'. This study introduces you to 'market condition' and how
to find it, as well as several market reference points. Other items in the
section such as 'Visual Graphics', 'TCP Data Intro', 'Overlay Demand Curve',
etc., can be consulted as needed.
To calculate Market Strategy:
On left sidebar, scroll down to the
section on "Data Packages". Click on 'Swing Trader Package'.
At 'End-of-Day Trader Control Package...' click on 'Background'.
Becoming familiar with auction market data and procedures:
On left sidebar, scroll down to "Order Free Trial".
Sign up for a two week
trial. Learn to use the 'Swing Trader Package'. One gains day-to-day
analyses of market condition and market reference points.
Learn about the 'Opportunity' markets offer:
On left sidebar, scroll down to the section "Data Packages".
Click on 'Advice Engine Package'.
Click on 'General Background'.
Search out
those parts on opportunity. Use the free trial to study the Advice
Engine data daily reports and research services.
Completion of these tasks give you an understanding of what is involved
in Market Strategy. You will have a good start on reading markets.
To go deeper, click on 'Short HomeStudy Course'. This five month, intensive
application of auction market principles and analysis is well explained
in the background information.
Step 3. Trader Strategy: Investment, Risk Aversion, Timeframe
Trader Strategy reflects the needs of the trader. It must fit within the
guidelines set by the Market Strategy. If the market is in balance, one path
is followed, if not, another. If the overall reward-to-risk ratio is poor,
the market is rejected. Exactly how trades are made depends on the trader's
outlook--day trader, long time-frame trader or anything in between. Included
are the trader's risk preferences, market preferences, times to trade and
any other variable unique to the individual.
Some Restrictions on Trader Strategy
Size of account limits futures traded and time held.
Number of contracts in the entry trade are limited.
Extreme volatility equates to large risk: do you want this?
Holding overnight carries longer term risk: do you want this?
Active day trading requires constant attention: do you want this?
Information on Market Strategy is factored in.
Step 4. The Working Strategy
With Market Strategy and Trader Strategy determined, a Working Strategy
comes from synthesizing the two. Worked out are risk parameters and limits,
state of the market, timing of trades, exit strategy, etc.
This is your contingency plan for a varied set of possibilities.
Step 5. Trading Your Plan: Reference Points
A trader builds trading decisions within the conditions set by the market and
his/her Trader Strategy. It is a 'model' in the sense that the trader has a
plan of action, but not the sort of exact model a beginner has in mind.
The trader takes what the market offers (Market Strategy) and works within that
framework. The basic trading plan is simplicity personified: "get on a trend
early and exit when it is over". Execution of the basic plan, using the
information in the Working Strategy, is the trading model.
Plan/Model Examples
A assumption is that one starts with a Working Strategy, with a plan outline.
The outline includes risk and other determinations one makes before starting
to trade.
The 'Plan For Today' might be "stay out of this market because it is too
volatile or the average opportunity is too low".
Or: as a daytrader, this market is in balance and I will seek to buy bottoms
and sell tops.
Or: as a daytrader, this market is trending up and I will seek to buy pullbacks.
Or: as a swing trader, I will buy upside breakouts and sell downside breakouts.
Or: as a swing trader, the market is trending up and I missed the breakout. I
will stand aside until the trading risk eases.
"Whatever my plan, I will use the appropriate reference points from the Trader
Control Package, The Day Trader Package and the Advice Engine. These reference
points will help determine the start of a trend, congestion during a trend
and trading points used by others (e.g. value support and resistance prices
from the Advice Engine Day Trader Report)."
Some of these reference points, with their sources, are:
Value & change: from Day Trader Package and Trader Control Package
Location of demand POC: from Day Trader Package and Liquidity Data Bank
Volume growing/easing: from Trader Control Package and Liquidity Data Bank
Volatility growing/lessening: from Day Trader Package and Trader Control Package
Relative size of volatility: from Trader Control Package and Free Tables of Averages
Initial Balance significant: from Trader Control Package
Balance/Trend: from Trader Control Package
Congesting or distributing: from Day Trader Package
A trader's day starts well before the market opening. The previous day and before if necessary,
is used to build the Market Strategy. This is integrated with Trader Strategy, resulting in
the Working Strategy. The last leads to today's trading plan or model.
The Trader Strategy
The trader's profile will not change radically. Most days it will be the
same as the day before. We set up a particular trader for this example:
The person: Mr. T. A fifty year old male who has had some success in the business world.
Trading Arena: A conservative day-trader, seeking four or five trades per day.
Trades during exchange hours
May computer trade or go through broker
Expects to be out at least 15 minutes before the close
Normally does not trade on the open, watches the first hour
Follows primarily one commodity, the SP Index. Occasionally
trades other futures.
Account size: $20,000
Risk per trade: $500 maximum (2.5% of account)
Target gain per trade: $250, not absolute--may hold for larger gains
Data Access: Ticker, CISCO Data
Trading methodology: 15 minute tick bars for timing,
Market Profile based data for trading decisions
Elements of Trading Strategy
TS.1 Enter only if trend start is obvious or highly probable. Exit on the first sign of congestion.
TS.2 Trade in low risk markets, either breakouts or buying bottoms or selling tops of balances.
TS.3 Accept no more than $500 in net losses in a day.
TS.4 Remain detached, unexcited, clear headed: Follow value, not price.
TS.5 Understand the markets and patterns, be aware of structures such as short covering rallies.
TS.6 Develop a Market Strategy prior to making trading decisions.
TS.7 Usually does not trade the first hour after open.
TS.8 Trades single contracts.
Consequences of the trader's preferences:
Needs general understanding of Auction Market Theory and market structures.
Primary market traded: emini SP, since volatility in the regular SP is over $500 (averaged $955, last 3 months).
Requires information on yesterday Market Profile for value (value area).
Requires information on market condition to set entry strategy for current day (if balance, needs limits, if trending,
needs direction).
Within day information on congestion will guide exits.
The Day's Market Strategy
In this example, market analysis will start with the close of May 3, 2002 for
trading on Monday, May 6.
Analysis will use the regular SP because volume data at price exists for it,
but not for the emini.
CISCO Trader Control Package (TCP) provides information on market condition
and other reference points on an end-of-day basis.
TCP data (reference points) for the close of May 3 shows:
Data is from CISCO Futures Visual Graphic Report (Part of TCP).
1) 5 day market is in balance. Upper limit = 108900, Lower limit = 106400,
risk = 312 ($780).
2) Volatility is 421 ($1052). Average (90 day) volatility is 382 ($955).
3) Value area is 107600 to 107080, with a center at 107250.
4) 1st hour's trading is 96% of the days range.
5) Volume is 109704 vs previous day (May 2) of 108051. 90 day average
volume is 114558.
6) Commercial traders capped the top at 108300, in the first half hour of
trading. Same for May 2 and 1.
Reference points 1) through 6) are all characteristic of a balanced market.
Market Strategy for a day-trader on as of close May 3 for Monday, May 6:
The three regions of interest: inside the balance, outside the balance
and the value area limits.
Inside a balance, price rotates, with the center (107650) being the focal point.
Price too far from the center will return. Price near the center could go
either way with equal probability.
Market activity inside the balance (108900 - 106400) should be traded as if
the balance is permanent. That is, wait until price nears a limit (108900 -
108590 or 106400 - 106720) and then look to sell if near the top, buy
near the bottom.
Trading outside the balance infers a breakout. It is an alert for the start
of a trend.
At the breakout, strategy changes from expecting price to rotate back to the
center of balance, to seeking evidence for start of trend. Now the strategy
is to look only for long trades on upside breakouts and shorts for the downside.
Value areas are a one-day piece of information for the day trader.
Price above or below the value area is an alert for a change in demand.
Modest changes in demand occur most days, even in markets in balance.
These changes often offer trading opportunities for day traders.
In this case the upper value area price is 107600, quite near
the center of the five day balance.
Lower value area is 107080, below the center, but still a distance
from the lower balance limit of 106400.
In addition to the three trading regimes, tradeability should be considered.
That is, does this market offer opportunity commensurate with the risk of
trading it? The one-market trader tends to ignore the question.
Still, with any market there are times it should be avoided; in particular if
it is too risky or if it
offers too little opportunity. Two rule of thumb risk evaluation methods are
the volatility (vs past
volatilities) and exchange margin requirements. Volatility jumps are easy to
understand, but exchange margins?
Exchanges need to protect the contract, to insure that those who trade can
pay the price of losing. A raised
exchange margin is a straightforward sign of increased risk. More
scientifically, CISCO's Advice Engine
research programs evaluate opportunity, risk and risk to opportunity.
The Advice Engine studies are explained
on the CISCO website. They show that the SP is highly tradeable.
Elements of Market Strategy
MS.1 Uptrend mode. Look only for longs above 108900, trade on pullbacks.
MS.2 Downtrend mode. Look only for shorts below 106400, trade on pullbacks.
MS.3 Trading inside the balance:
Below 10672 look for upturns (trading a balance). Below 106400 switch to downtrend mode.
Above 108588 look for downturns (trading a balance). Above 108900 switch uptrend mode.
MS.4 Maintain a preference for the downside, since commercials capped three days in a row.
MS.5 Value area trading: Long above 107600, short below 107080. No trading in between (in value).
MS.6 Directional alert upon breakout of 1st hour range on May 3.
MS.7 Measure congestion threshold by 3 TPO's on the price line.
MS.8 Tradeability and opportunity is adequate.
MS.9 Volatility around $1000
Working Strategy for SP May 6, 2002
WS.1 Meeting criteria TS.1 (enter on trend), map the market data from MS.1, MS.2, Ms.3 and MS.6
Upper Balance Limit 108900
Risk 108580
Balance Center 107650
Upper Value Area 107600
VA Center 107250
Lower Value Area 107080
Risk 106720
Lower Balance Limit 106400
Alert areas for long entry: 108900, 107600 and region 106400 - 106720
Alert areas for short entry: 106400, 107080 and region 108900 - 108580
WS.2 TS.3 specifies maximum risk ($500). MS.9 volatility of about $1000
precludes SP. Switch to emini, UU.
Volatility is now about $200 (1/5 contract size). The trader sets trading
risk at $300, 1.5 times the volatility.
In the emini SP $300 is 600 points.
A single contract is traded with a risk of $300 from entry.
WS.3 TS.2 (low risk markets) is fulfilled by chosing balanced condition and
trading UU instead of SP.
TS.4, TS.5 and TS.6 are supported by the Market Strategy value analysis.
WS.4 TS.5 is fulfilled by trader experience and studies of Auction Market Theory.
WS.5 Following MS.4 gives trader a preference for downside trading.
WS.6 Standing aside the first hour of trading fulfills TS.4 and MS.6.
WS.7 Exit no later than 15 minutes before the close.
The Market of May 6
The first hour of trading defines the Initial Balance. This is the arena
marked out by the professionals as a 'trial balance'. Exchange members
and other professionals like to have a balance within which to trade.
The Initial Balance represents a strong effort to dominate the market.
Mr T stands aside for the first hour. The Initial Balance is 107650 - 106950,
(fifteen minute tick bars in Figure WSF 1.).
His strategy from rule WS.1 suggests a short at the value area lower limit,
107080.
But the lower Initial Balance is 106950. Mr T does not want put on a trend
trade in a balance region. So he modifies his value area short side entry to
a sell below 106950, say at 106925.
He will still take a long at the upper value area
limit 107600. Otherwise, his strategy WS.1 through WS.6 is unchanged.
Referring to figure WSF 1., the value area upper limit of 107600 is touched in
the 9:45 to 10:0 time frame, but there is no breakout.
The next two hours are spent within the Initial Balance. In the 12:15 to 12:30
period Mr T gets his short at 106925. He places a stop at 107525 ($300 risk).
The stop is never threatened. Mr T keeps watching for signs of congestion, a
bunching of TPOs. Figure WSF 2. is a Market Profile of May 6. After the entry
at 106925 the market spirals down. There are never more than two TPOs at
any price--so no congestion.
On the way down, at 14:00 to 14:15 the lower balance limit is breached at 106375
(one tick below 106400). This is another selling opportunity for Mr T.
Following rule WS.7, Mr T exits at 15:00 at a price of 105250. Results before
costs and slip:
Trade 1 in short at 106925, out at 105250: gain 1675
Trade 2 in short at 106375, out at 105250: gain 1125
Disclaimer: This theoretical trade is an example to illustrate the auction
market approach to trading. There is no Mr T and this is a paper trading
example. Data used herein is from sources deemed reliable.
8:30: 0 107275 107550 106950 107500 1478
8:45: 0 107500 107650 107350 107375 1376
9: 0: 0 107350 107475 107000 107175 1281
9:15: 0 107225 107550 107125 107425 976
9:30: 0 107425 107575 107250 107475 807
9:45: 0 107450 107600 107325 107425 820
10: 0: 0 107350 107550 107300 107400 537
10:15: 0 107450 107500 107175 107250 502
10:30: 0 107150 107400 107100 107325 594
10:45: 0 107400 107400 107025 107175 481
11: 0: 0 107175 107300 107075 107200 454
11:15: 0 107250 107275 107025 107200 466
11:30: 0 107175 107200 106975 107025 376
11:45: 0 107100 107200 107025 107100 297
12: 0: 0 107100 107250 107075 107200 286
12:15: 0 107250 107325 106825 106875 735
12:30: 0 106875 106950 106675 106700 972
12:45: 0 106775 106850 106600 106775 668
13: 0: 0 106775 106800 106575 106725 825
13:15: 0 106750 106750 106550 106650 519
13:30: 0 106525 106675 106425 106500 832
13:45: 0 106525 106575 106400 106550 639
14: 0: 0 106500 106575 106125 106400 874
14:15: 0 106275 106425 105825 105925 1313
14:30: 0 105975 106025 105600 105675 1104
14:45: 0 105675 105675 105200 105250 1400
15: 0: 0 105250 105300 105000 105150 1090
Figure WSF 1. 15 Minute Tick bars SP emini May 6, 2002
UU DEL-MO/YR 06 02 MO/DY/YR 05 06 02
OPEN,CLOSE 107250 105175
HIGH,LOW 107650 105000
# Ticks 21834
MARKET PROFILE* REPORT FOR 05 06 02
AND SEGMENTED AUCTION
COMMODITY -- Mini S&P 500 (CME-IOM)JUN 02
Price Brackets Segmented Auction
107650 B B
107625 B B
107600 BD B |D | | |
107575 BD B |D | | |
107550 BCDE |B C |D |E | | | | |
107525 BCDE |B |C |D |E | | | | |
107500 BCDE |B |C |D |E | | | | | |
107475 BCDE |B |C |D |E | | | | | | |
107450 BCDE |B |C |D |E | | | | | | | |
107425 BCDE |B |C |D |E | | | | | | | | |
107400 BCDEF |B |C |D |E |F | | | | | | | | |
107375 BCDEF |B |C |D |E |F | | | | | | | | |
107350 BCDEF |B |C |D |E |F | | | | | | | | |
107325 BCDEFI |B |C |D |E |F | | |I | | | | | |
107300 BCDEFGI >B >C >D >E >F >G > |I | | | | | |
107275 BCDEFGI |B |C |D |E |F |G | |I | | | | | |
107250 BCDEFGI |B |C |D |E |F |G | >I | | | | | |
107225 BCEFGI |B |C | |E |F |G | |I | | | | | |
107200 BCEFGHI |B |C | |E |F |G |H |I | | | | | |
107175 BCEFGHI |B |C E |F |G |H |I > > > > > >
107150 BCFGHI |B |C F |G |H |I | | | | | |
107125 BCFGHI |B |C F |G |H |I | | | | | |
107100 BCFGHI |B |C F |G |H |I | | | | | |
107075 BCFGHI |B C F G |H |I | | | | | |
107050 BCFGHI B C F G |H |I | | | | | |
107025 BCFGHI B C F G |H |I | | | | | |
107000 BCHI B C H I | | | | | |
106975 BHI B H I | | |
106950 BIJ B I J | | |
106925 IJ I J | | | <= Short
106900 IJ I J | | | Value Area
106875 IJ I J | | |
106850 IJ I J | | |
106825 IJ I J | | |
106800 JK J K | | |
106775 JK J K | |
106750 JK J K | |
106725 JK J K | |
106700 JK J K | |
106675 JKL J K L | |
106650 JKL J K L | |
106625 JKL J K L | |
106600 JKL J K L | |
106575 KLM K L M | |
106550 KLM K L M |
106525 LM L M |
106500 LM L M |
106475 LM L M |
106450 LM L M
106425 LM L M
106400 LM L M
106375 M M <= Short
106350 M M Balance limit
106325 M M
106300 M M
106275 M M
106250 M M
106225 M M
106200 M M
106175 M M
106150 M M
106125 M M
106100 M M
106075 M M
106050 M M
106025 MN M N
106000 MN M N
105975 MN M N
105950 MN M N
105925 MN M N
105900 MN M N
105875 MN M N
105850 MN M N
105825 MN M N
105800 N N
105775 N N
105750 N N
105725 N N
105700 N N
105675 N N
105650 N N
105625 N N
105600 N N
105575 N N
105550 N N
105525 N N
105500 N N
105475 N N
105450 N N
105425 N N
105400 N N
105375 N N
105350 N N
105325 N N
105300 NP N P
105275 NP N P
105250 NP N P <= Exit
105225 NP N P 15 min
105200 NP N P to close
105175 P P
105150 P P
105125 P P
105100 P P
105075 P P
105050 P P
105025 P P
105000 P P
Figure WSF 2. Market Profile for SP emini, May 6, 2002.
In my recent articles on auction market analysis (S&C June, July and November,
2002) I gave examples of making trades with value based information.
Implicitly
these were all first chance, breakout trades. One does the analysis,
the market meets the entry criteria and boom, the trade is initiated.
In the real world we sometimes
miss that first chance. Most of us know better than to chase a trade. But, on
occasion, the market offers us a second chance. Recognizing a valid second
chance opportunity is more difficult and takes more market knowledge than entry
on breakout. Second chances can come in a variety of guises, but they have two
general characteristics: the initial breakout comes out of a congesting market
condition and the second chance occurs during a subsequent congestion.
This article takes you through a second chance trade. The second chance
aspect of this trade is an accidental by-product of research on the BuySell
data base (an end-of-day report from the CBOT
with buy-sell statistics for members and the public). I needed a breakout day
in an active market to get a feel for public trading behavior in the few days
prior to breakout. The example chosen, DJ on July 19, 2002, happened to be a
case where the market experienced an overnight breakout. The swing trader who
is active only during floor hours missed the trade.
Missing a trade is a serious matter for a swing trader who is active
in only a single market.
The dynamics of the market limit the number of breakouts--it takes
five days to develop a five day Overlay, subsequently there comes a breakout
and trend for a few hours or days; a new five day Overlay develops and so
forth.
Even in active markets like the Dow Index discussed here, there are relatively
few breakouts per month.
When the market analysis in a missed opportunity strongly supports the value
change, the trader's natural question is "will the market give me a
second chance to get into that trade?".
Second chances are of great interest to day traders too. The day trader
is actively looking for entries all day long. For both day and swing
traders the rules are deceptively simple: get onto a trend as it begins,
as it is just coming out of congestion. Then
exit when the market goes back into congestion. The time frames are
different; swing traders measure exiting congestion in hours or days,
day traders in minutes. Both
swing and day traders agree on entry from breakout. Both will enter on
a second chance when the market offers. After entry the swing trader will
typically rely on a stop or evidence of congestion for exit while the day
trader will micromanage the trade for a short term gain. After exit, the
swing trader is usually done with
that market for the day, but the day trader is looking for another 'second
chance', i.e. for short timeframe congestion and subsequent breakout.
How can you tell if the market is offering you a second chance?
Market knowledge
is the key whether the specific situation is a breakout, as in this study, or
the continuous market that day traders typically follow. You will track value
and market condition as the market revealed them earlier, or as they are
currently developing. The tools for locating value in auction markets
have been presented in my recent
S&C articles. You are assumed to be conversant auction market nomenclature.
This example starts with the Dow Jones Index at the market close of
July 18, 2002. We assume that the trader:
....Swing trades (larger risk, larger expectation than day trading)
....Is active during floor hours only
....Follows breakout trades only
....Always places a stop on entry
....Does not hold indexes overnight
Conditions at the close July 18, 2002
Market is in a 5 day balance
ULIM = 88300 (resistance)
LLIM = 83200 (support)
Market Profile
VAU = 86000 (1 day resistance)
VAL = 85060 (1 day support)
Volatility
VTY = 477 AVG = 358
Trade Facilitation
TFF = 4.04 AVG = 3.5
Volume
VOL = 60254 Yest = 77658 AVG = 54000
BuySell Net Public, Difference (B - S)
7/18 = -594, 7/17 = -453, 7/16 = -152, 7/15 = +330
Net last four days: -869
These auction market data provide us the means to analyze the market for
tomorrow. Then we can formulate a strategy based on auction market theory
and data.
Basic Strategy at close of 7/18, with commentary:
Market Condition = 5 Day Balance: ==> Defines value limits
ULIM = 88300
LLIM = 83200
Comment: The market is balanced with resistance at 88300, support at 83200
Range = 5100 ($5,100)
Octant risk = 638 (1/8 of ULIM - LLIM range)
Market Profile: Latest day value
VAU = 86000
VAL = 85050
Comment: Market Profile value area is within the 5 day resistance/support
Range = 950, nominal octant risk is 119
Volatility 477
Comment: Volatility is some 33% above average, presaging increased market
activity. Higher volatility equates to enhanced trader interest.
Trade Facilitation (TFF)
Comment: Trade facilitation is adequate, there is public participation
TFF is yes or no. Yes means many opportunities are present (wide range).
BuySell Statistics Last Four Days = -869
Comment: Last three days all negative, public is net selling.
The public drives markets out of balance. Here the drive is down.
Evaluation: Market Analysis as of the close, 7/18
Non-directional reference points
Market appears well balanced: Octant risk = $638
Value area range = $950
Trade Facilitaition weighted toward congestion as is
expected in balanced markets.
Volatility at 477 is 33% above the average.
The high volatility may presage
a market condition change.
Volume is higher than normal--even in balance this market is drawing attention.
Volume is lower on the 7/18 than the day before. Ignore this, since the
7/18 volume is still higher than normal.
Directional information: Public has been net selling for the last three days.
This bearish sentiment argues a downside preference.
Strategy as of the close 7/18:
1) Be prepared to go with a breakout long above 88300, risk $638
2) Be prepared to go with a breakout short below 83200, risk $638
3) Short timeframe: go long a breakout above VAU, 86000, risk $119
4) Short timeframe: go short a breakout below VAL, 85050, risk $119
5) Wait for Initial Balance on 7/19 before taking action
6) Directional expectation is down from bearish public net selling
You, the swing trader, see the market open well below your entry point for
a short. Your emotional take is "rats, I missed a potentially profitable
trade". All your evidence points to a confirmation of your analysis. Yes,
you would have been very comfortable with a short position, taken at breakout.
The next analysis point is the end of the Initial Balance hour. This hour is
the professional trader's time. They are less interested in value and value
change than they are in developing a comfortable trading range to operate within.
You are interested in value. Your analysis tells you to be short or out.
Will the Initial Balance price rotation offer you a second chance?
The Initial Balance (approximately 1st hour) range is:
IBU = 82900
IBL = 82100
IB last = 82350
At the completion of the first hour (IB) you collect your information:
1) A downside breakout occurred prior to the opening
2) Your downside preference from BuySell data is confirmed
3) The high volatility action predictor came to pass.
4) The Initial Balance is within a reasonable distance of the lower limit
5) The Initial Balance has closed above it's low
6) This is a downward moving market.
** All your analyses support the weak market theory
General rule: Only seek shorts in downward trending markets.
Reasons to override the "do not chase missed trades rule"
A) Value considerations: The market has recently broken through
the Lower Balance Limit, the Lower Value Area and is currently well
inside the most recent value defined by the Initial Balance.
B) The dollar risk ($850) is reasonable compared to the octant risk
of $636 that one would take in a regular breakout. The excess risk
of $214 is acceptable in view of the market's pattern and consistency,
i.e. items 1 - 6 above.
C) The IB retracement from it's low may merely be an effect of the way
the IB is formed, e.g. the rotational nature of the IB process, not
evidence that value has bottomed at the IB low. If this is true,
the latest price (82350) is a valid entry point, a second chance.
Risk considerations:
1) Entering short at IB last with a stop at IBU is $550 risk.
IBU is a very recent high price set by the floor processes
and may not be a valid value-based trading point.
2) Entering short at IB last with a stop at LLIM is an $850 risk.
LLIM is a longer term definition of value (support) and
price above that would suggest market is moving back into balance.
You do not want to trade directionally in a balance.
3) Octant risk is $636, so IBL stop ($550) is likely too small.
Stop at LLIM ($850) is preferable.
Trading Decision
1) The market is comfirming the reference points because of:
a. Breakout from the balance condition on the downside.
b. Breakout down from the profile Value Area.
c. Volatility predicted market movement, it happened.
d. Market was facilitating trade, not shutting down.
e. Above average volume indicates trader interest.
f. BuySell data shows the pubilc is bearish.
2) Items 1) a - f are all consistent with downside trading.
3) The risk of $850 is some $200 above that for trading at breakout
This is deemed acceptable, since the analysis is so strong
4) The pullback in the Initial Balance is the opportunity
to follow the "shorts only in downward markets" dictum.
5) Enter short at 82350 (market order at 8:15)
6) Set stop at LLIM = 83200
The reader can map out the trade with the help of the 15 minute tick bars
below. Note that the alternate stop at 82900 would have been hit in
the 9:15 - 9:30 period. The trade, as proposed on the basis of Auction
Market Theory, turns out to be a very good one indeed.
Trading always involves a trade-off between risk and reward. In the
current example the reference points were so strong that you would
take the trade on the first 'second chance' opportunity.
If the data were somewhat less supportive, you have another
possibility. After the Initial Balance period is completed
your strategy could be to take your short position only if the
IB broke it's low at 82100. If that does not happen, you have
saved a loss. If it does, you have given up $250 in opportunity
potential and increased your risk stop to $1100 (the $850 from
IB last + the $250 from IB last to the IB low). The weakness in
this argument is that the IB is not strictly based on value, but
somewhat at least, on the non-value based needs of the professionals.
The Next Day (Monday, July 22) for the Swing Trader:
We assume the day trader would have exited sometime during the day,
according to the trading methodology being followed. But what of
the swing trader? A swing trader who only exited on a non-progressive
stop would be in at the close. Analysis of one's trading methodolology
for holding overnight is the subject of our text, Value Based Power
Trading, free on the CISCO website (www.cisco-futures.com).
An assumption at the beginning is that the swing trader does not hold indexes
overnight. The extremly high risk of holding is mirrored by the high
margins required by the exchanges. If the trader exited 15 minutes prior
to close, the exit price of 80000 gives a profit of $2350 before slip and
other costs. Certainly a good result considering the $850 risk accepted.
But it is not the amount of the result that is important. Auction market
analysis allowed you to recognize the second chance. Auction market analysis
let you analyze the market so that you knew you wanted a second chance. So,
even if the trade had been a loser, your reasons for making the trade were
valid.
Further, it was auction market analysis reasoning that set your stop.
Note that had you used the IBU risk of $550 you would have been stopped
out at 82900 in the 9:05 - 9:20 timeframe. In truth, there was no
auction market (value) reason to set the at stop the the IBU point. It is
just attractive because the amount you put on the line is $300 less.
Using the value related stop dodged that bullet.
Recap
Before the open on 7/19 you knew this was a day that held good trading
potential. The market was in balance (congesting). Volume was up,
volatility was up, the market was facilitating
trade and you even had a directional indicator from the net public
selling. You knew exactly where the 'first chance' trading opportunity
was located; at the five day breakout price. The minute the market
opened you knew your 'first chance' was unavailable. Based on your
auction market analysis, you also knew you would like to have a second
chance.
You know the breakout came out of congestion and a second chance will
also come from congestion. If the market offers a second chance you
can immediately find your risk, based on the most recent value, defined
as the lower limit of the Overlay on 7/18. You know this risk will be
higher than in the first chance entry and by how much. You can then
decide to trade or not, based on solid information and your attitude
toward risk.
DOW JONES FUTURE, 15 Minute Tick Bars
July 19, 2002 September contract
7:20: 0 82800 82900 82550 82550 61
7:35: 0 82600 82650 82100 82300 91
7:50: 0 82350 82500 82250 82500 37
8: 5:00 82460 82500 82300 82450 40
8:20:00 82400 82640 82250 82250 108
8:35:00 82300 82700 81850 82300 183
8:50:00 82350 82500 82100 82300 112
9: 5:00 82350 83000 82200 82700 181
9:20:00 82650 82700 82350 82450 151
9:35:00 82400 82450 82050 82200 121
9:50:00 82150 82350 81650 81850 102
10: 5:00 81800 82050 81650 81800 87
10:20:00 81750 81850 81200 81450 131
10:35:00 81500 81550 81100 81250 92
10:50:00 81200 81450 81150 81450 109
11: 5:00 81490 81800 81400 81550 85
11:20:00 81600 81700 81250 81300 66
11:35:00 81350 81500 81100 81300 87
11:50:00 81260 81400 81100 81300 66
12: 5:00 81330 81400 80850 80950 66
12:20:00 81000 81350 80950 81350 60
12:35:00 81400 81850 81300 81650 101
12:50:00 81700 81880 81250 81350 117
13: 5:00 81400 81500 81200 81260 51
13:20:00 81280 81350 81000 81200 65
13:35:00 81210 81210 80600 81000 126
13:50:00 80950 81400 80900 80950 110
14: 5:00 81000 81100 80700 80900 92
14:20:00 80850 81200 80650 80750 103
14:35:00 80700 80700 79850 79850 191
14:50:00 79900 80150 79450 80000 181
15: 5:00 79950 80200 79950 79950 75
Figure WSF 3. Fifteen minute tickbars for DJ, July 19, 2002.
---------------------------------------------------------------
References
CISCO Homepage http://www.cisco-futures.com
Auction Market Theory, at "Whats New"
Trading as a Career, at "Whats New"
"Swing Trader Package" aka "End-of-Day Trader Control Package"
Background
"Advice Engine Package" for 'Opportunity'
'Advice Engine Report'
'Advice Engine Day Trader Report'
Appendix
Theory provides structure and strategy
General structure of markets intra-day
Prices set by negotiation
Daily MP bell shaped
Some prices accepted, some rejected
Members want balance
Initial balance attempts to set day pattern
Commercials capping of markets
Value area
Volatility
Trade facilitation
Demand measured by volume
Trading range
Special situations, e.g. short covering rally
Market structure longer term concepts
Market condition (balance, trend or between)
Market cycle timing/change
Value migration
Volume change
Volitility change
Day-to-day serial correlation lacking
Exchange determined margins
Risk evaluation
Opportunity evaluation
Strategy is initially set by market conditions plus trader orientation.
1) A trader may be day-trade oriented or longer term.
a. Day traders
Can seek very low risk and be satisfied with very low return per trade
Will trade many times per day
Can accept more risk for higher potential returns
Will trade few times per day
b. Swing/overnight traders accept more risk for larger potential returns
1) A daytrader in a balanced market will be selling tops and buying bottoms.
2) The same individual in a trending market enters on pullbacks,
but does not trade against the trend.
Trading Model: Application of theory and data
Trading is profitable only in moving markets.
A model is designed to enter an emerging trend early in the
the beginning of 'distribution' and exit on evidence of
congestion 'accumulation'.
Market condition is the foundation of analysis
Balanced markets, by definition are accumulating.
Trader relies on internal trends (responsive trading)
or breakouts (alert for start of distribution).
Opportunity tends to be smaller, but so is risk.
Trending markets offer larger opportunity at greater risk.
Model development depends on the trader's risk attitude, field
(day or longer term), financial base and emotional structure.
Some daytraders seek two or three ticks per trade and may trade
many times a day. Other daytraders take larger risks for greater
returns and hence, trade much less often. The same is true for
the less risk averse swing or longer term trader.
-----------------------------------------------------------------------
MARKET PROFILE* REPORT FOR 12 18 02
AND SEGMENTED AUCTION
COMMODITY -- Mini S&P 500 (CME-IOM)MAR 03
Price Brackets Half-Hour Bars
89750 B B
89725 B B
89700 B |B
89675 B |B |
89650 B |B | |
89625 B |B | |
89600 B |B | |
89575 B |B | |
89550 B >B | |
89525 B |B | |
89500 BCI |B |C | |I
89475 BCI |B |C | |I
89450 BCI |B |C | |I
89425 BCI |B |C | |I
89400 BCI B |C | |I
89375 BCIK B >C | |I |K
89350 BCIK B |C | | |I | |K
89325 BCIK B |C > | |I | |K |
89300 CHIK |C | | | |H |I | |K | |
89275 CHIKL |C | | | |H |I | |K |L |
89250 CHIKL |C | | | | |H |I | |K |L | |
89225 CHIKL |C | | | | |H |I | |K |L | |
89200 CGHIKLP |C | | | |G |H |I | |K |L | | |P
89175 CGHIKLP |C | | | |G |H |I | |K |L | | |P
89150 CGHIKLP C | | | |G |H |I | |K |L | | |P
89125 CDGHIJKLNP C |D > | |G |H |I |J |K |L | |N |P
89100 CDFGHIJKLNP C |D | >F >G >H >I >J >K >L | |N |P
89075 CDFGHIJKLMNP C |D | |F |G |H |I |J |K |L >M >N >P
89050 CDFGHIJKLMNP C |D | |F |G |H |I |J |K |L |M |N |P
89025 CDFGHIJKLMNP C |D | |F |G |H |I |J |K |L |M |N |P
89000 CDFGHIJKLMNP C |D | |F |G |H |I |J |K |L |M |N |P
88975 CDFGIJKLMNP C D | |F |G | |I |J |K |L |M |N |P
88950 DFJKLMNP D | |F | | | |J |K |L |M |N |P
88925 DEFJKLMNP D |E |F | | | |J |K |L |M |N |P
88900 DEFJLMNP D |E |F | | |J | |L |M |N |P
88875 DEFJLMNP D |E |F | | |J | |L |M |N |P
88850 DEFLMNP D |E |F | | | |L |M |N |P
88825 DEFLMNP D |E |F | | | |L |M |N |P
88800 DEFLMNP D |E |F | | | L |M |N |P
88775 DELMNP D |E | | | L M |N |P
88750 DELMNP D |E | | | L M N |P
88725 DEMN D |E | | | M N
88700 DEMN D |E | | M N
88675 DEM D |E | | M
88650 E |E | |
88625 E |E | |
88600 E |E |
Figure V1. Market Profile of eMini S&P, December 18, 2002. The
half-hour bars on the right show the cumulative POC
(point of control) identified with the > symbol. The
vertical line (|) delineates the Value Area as it changes
throughout the day. B is 8:30 to 9, C is 9 to 9:30 and
so on. Market Profile from CISCO archives.
Calculation of Volatility from half-hour bars (MP)
Half-hour bar range
B 89750 - 89325 425
C 89500 - 88975 525
D 89125 - 88675 450
E 88925 - 88600 325
F 89100 - 88800 300
G 89200 - 88975 225
H 89300 - 89000 300
I 89500 - 88975 525
J 89125 - 88875 250
K 89375 - 88925 450
L 89275 - 88750 525
M 89075 - 88675 400
N 89125 - 88700 425
P 89200 - 88750 450
TOTAL 5575
VOLATILITY 5575/14 = 398.21 VTY = 39.82 (basis index)
$VTY = 199
Figure V2. Half-Hour Bars of eMini S&P, December 18, 2002. The
volatility for the day is 39.82 ($199).
8:30: 0 89600
8:30: 0 89625 +25
8:30: 0 89600
8:30: 0 89625 +25
8:30: 0 89600
8:30: 0 89625 +25
8:30: 0 89600
8:30: 2 89625 +25
8:30: 3 89600
8:30: 3 89625 +25
8:30: 3 89600
8:30: 3 89625 +25
8:30: 3 89600
8:30: 3 89625 +25
8:30: 3 89600
8:30: 6 89575
8:30: 7 89600 +25
8:30: 7 89575
8:30: 7 89600 +25
8:30: 7 89575
8:30: 7 89600 +25
8:30: 7 89575
8:30: 8 89600 +25
8:30: 8 89575
8:30: 8 89600 +25
8:30: 8 89575
8:30:10 89550
8:30:10 89575 +25
8:30:11 89600 +25
8:30:11 89575
8:30:11 89550
8:30:11 89575 +25
8:30:11 89600 +25
8:30:11 89575
8:30:11 89600 +25
8:30:11 89575
8:30:13 89600 +25
8:30:13 89575
8:30:13 89600 +25
8:30:13 89575
8:30:14 89600 +25
8:30:14 89575
8:30:14 89600 +25
Figure V3. Ticks, eMini S&P, December 18, 2002, first few seconds.
Randomness display. Only up ticks listed for clarity.
This market first ticked at 89600; ticked up, ticked down and forty three
ticks later was back where it started. A range measurement would show
an average of somewhat more than 25, all of which is noise. This short
sample does not treat the actual noise level. It must be greater than
25, the minimum tick. How much greater is difficult to knowm since it is
random. We will devise a way to make the estimate.
Figure V4. Volatility calculated with tick bars of varying length for
eMini day trading (8:30 to 15:15) on December 18, 2002.
At very short times (1, 3, 5, 10, 15 and 20 minutes) the
calculated volatility forms an arc with increasing time.
Between 20 minutes and 30 minutes the arc transitions
into a straight line. The beginning of the transition
area (the knee) is where the noise has become small relative
to the volatility being measured. The end of the transition is
where the time effect (larger bars) has overcome the
volatility.
Evaluating the Volatility Measurement
March 14, 2001
The Advice Engine
Designed for the day trader, Advice Engine Report covers all U.S. futures
markets, isolating 50 to 100 potential low risk trades each day. A sub group
of selections, the Select Table, typically has about five entries chosen for
their exceptional reward to risk ratios.
The
Advice Engine, just as it's predecessor DecisionTable, is based on
theoretically sound Auction Market Principles. It offers many benefits to
the trader: the trader can trade safely at low risk without searching for
candidates all the time. The one-market trader has the advantage of having
the low risk points if they exist; and if they do not, knowing where the
market is and how to handle it.
The Advice Engine Report is used for laying out the next day's trading,
what to trade and at what risk. Within the day, one's trades can be
tracked via internet, pager and cell phone.
Advice Engine went into beta test November 1, 2000 and regular service
began March 1, 2001. The four month period of beta test saw the Select Table
post 399 recommendations of which 147 broke out (initiated trades). These
147 trades averaged a Potential (best possible result) of $1,151. While
no one can trade up to the Potential, the $1,151 average validates the
Advice Engine as a search process for the trader.
For a thorough review, go to the homepage and scroll down to 'Data' on
the left sidebar. Find the Advice Engine line and click on it. Then
click on the Background link.
------------------------------------------------------------------------
Daily Decision Table for Day-Traders
For a thorough review, go to the homepage and scroll down to 'Data' on the left sidebar. Find the Decision Table Data line and click on it. Then click on the Background link. Date Dys #Opps #Actions $Potential $Avg $Median 99 Jan (r) 18 169 82 54,754 667 300 99 Feb (r) 19 187 81 30,399 162 212 99 Dec (b) 21 185 55 23,972 436 190 00 Jan (b) 20 195 84 49,678 591 175 Totals 78 736 302 158,803 525 219 (r) Research testing (b) Real time beta test Average Opportunity $525 Median Opportunity 219 Avg Opps per Day 9.4 Avg Actuations per Day 3.9 Full Year 2000 Summary # Trades 1020 Average Risk $308/tde Average Potential $516/tde Cost $95/month ------------------------------------------------------------------------
Marvin Minsky and the Emotion Machine
Professor Marvin Minsky of MIT, is widely credited with developing the
concept of artificial intelligence and the thinking machine. His new
book The Emotion Machine (Fall 2001) addresses 'emotions' as another
of the complex thoughts humans have.
An important concept to this reviewer is how Minsky views 'case studies'.
He sees our memory of a case study as "a little story you made up that
has a plot, a main character and a problem to solve". Humans learn from
case studies. In many professions case studies make up one's internship,
or apprenticeship. The more intelligent of us are able to synthesize
the information we learned from specific cases to the general. This
allows us to address and solve unfamiliar problems on the basis of the
specific cases we worked with.
Minsky feels that an emotional state is a slightly different way of
thinking. We reason in many situations, emotions are no different.
Thinking, he says, is seeing something and asking "what does that remind
me of". So there really aren't emotions per se, just different ways of
thinking. Most machines work with logic and are not good at looking at
a problem from many sides. An Emotion Machine would be capable of "many
different ways of thinking".
As an illustration, what is represented to you when you see a telephone?
"...A social part of your mind sees this as a part of a communication
system. The economics part of your mind sees the phone as something
you are paying $24 per month for. A physicist sees it as an electrical
device. Others see it as someone they are talking to. Others haven't
even thought about how the signals get from one place to another."
Each is a way of thinking. Each is a part of a whole.
------------------------------------------------------------------------
The Psychology of Stress in Trading
By D.L. Jones
Background
I recently ran across a brief note on stress in patients and it's relief by information from their physician. One sentence struck me "The only reason for non-productive problem solving -and stress- is lack of information". While the article addressed ill people and their health care providers, I saw it as equally appropriate for traders. But with traders there is no outsider to blame for the stress, just oneself. Anyone can learn how auction markets behave. Few make the effort. Most just seek a winning "formula".
Using Leverage Wisely
Leverage abuse often results from a misunderstanding of the futures market.
A futures trader has a margin account just like an account in stocks. But
these accounts are very, very different. The stock account is invested
in securities that are 100 percent owned: there is no leverage. A drop
of ten percent in the price of the security translates into a ten percent
loss. With futures, ten percent of the account can control commodities
worth more than the value of your entire investment.
Margin Deposits in Futures
The futures 'Margin' account is 'earnest money', a guarantee that trading
losses will be covered. It protects the brokerage and the exchange.
The futures trader must view the money in his account the same way a poker
player sees the chips on the table in front of himself. This is risk capital.
If it is all bet on each deal of the cards, even the best player in the world
will ultimately go broke. The amount of one's risk capital is only part of
the equation. There is always some probability of loss. So the question
becomes, how much of my pot, my risk capital, can I afford to lose on this
trade?
The Five Percent Per Trade Rule
Exchange minimum margins are set by the exchange and reviewed as the
market's volatility changes. The exchange attempts to minimize the risk
of default to the exchange and member firms. To the trader, margin
required roughly translates to the risk involved. In addition to the
exchange margins, some firms have their own minimums which are
higher than the exchange.
It is a general rule of thumb in money management to limit one's risk on
a particular trade to no more than five percent of the capital available
in one's account. For a $20,000 account, five percent is $1,000. Many
futures can be traded for initial margin of $1,000 or less. Higher margins
are required on S&P, oils, coffee, etc. A $5,000 account, practically
could not trade, using the five percent rule. The small accounts trade
with higher risk. This only means that small account holders should
exercise a lot of care in looking for low risk trades.
There are a number of books and studies of leverage. We repeat and explain
a formula that recently appeared in the magazine 'Stocks and Commodities',
July 2001, page 24.
The variables are:
First is your experimental profit loss ratio. Say a winning trade makes
you $3 and by limiting your losses, a losing trade (on average) costs $1.
Then your profit/loss ratio is 3/1 = 3.
Second is your experimental percentage of wins. If you (on average) win
one and lose two, your probablility of success is 1/3 = 0.33.
Let A = profit/loss ratio
p = probablility of success
f = the trading percentage of your capital to risk for optimum return
f = {[(A+1) * p] - 1}/A
Case 1: A = 3
p = 0.50
f = {(4 * 0.50) -1}/3 = 1/3 = 0.33
so you should risk one-third of your account on each trade
Case 2: A = 2
p = 0.40
f = {(3 * 0.40) -1}/2 = 0.2/2 = 0.1
so you should risk one-tenth of your account on each trade
Case 3: A = 3
p = 0.29
f = {(4 * 0.29) -1}/3 = 0.16/3 = 0.05
so you should risk one-twentieth of your account on each trade
A reasonable starting place for the beginner is with A = 3 and about
a 30% win probability. In that case, one would risk 5% of one's money
on each trade. As your hit ratio of trades won improves, you can risk
more of your money to get the optimum return.
Leverage and Risk Control
Proper use of leverage can enhance profits. The key is to never risk too
much. This is an arena that fear controls. To spread risk, one trades
a portfolio of futures. Any future can become very volatile and stay
that way for a long period. For instance, the first half of 1996 was a
very volatile and risky period for the S&P futures. There were few low
risk trades available (one trading model of CISCO's made exactly one trade
in that period). While S&P's were wild, other futures were quite tradeable,
such as the corn and soybeans. When silver was so bullish back in 1980
we lost two straight limit move trades ($5,000 each). Since silver was
part of a large portfolio we were able to continue with it. The next
trade after the two big loses netted out $98,000; an outstanding example
of the value of spreading risk via a portfolio.
Leverage: The Entire Account
How much of an account should be margined at one time? The short answer
is never more than fifty percent. The longer answer is more complicated,
depending on one's view of open trade equity. Open trade equity comes
from successful trades that have not yet been closed out. Say you have
on a short T-note trade, entered March 9, 1994 at 10818. It is now April
8 and the market closed at 10514. You are still in the trade with over
$3,000 in open trade equity. How do you view that money? Is it money
to use for margin for other trades, (if so, how much)? Your analysis
says the downtrend is intact and you plan to stay in this trade.
Experience has shown that open trade equity is still 'money on the table',
just like in a poker game. If you view open trade money as 'yours', the
only way to make sure is to exit the trade. Otherwise, you are still at
risk for some or all the open amount. Spending or commiting it before
you have control escalates your risk.
Liquidity Data Bank, Commercial Activity and Buy-Sell Statistics
Absolutely the best data money can buy!!
For the first time, the public trader can see exactly where the floor
members at the exchange are buying, where they are selling.
The trading volume is listed
at every price for each of the four member types broken down into
how much is buying and how much
is selling. The report also has the commercial capping activity and
a summary of buying and selling for the past ten days.
To learn more about the Liquidity Data,
click on "LDB Data" (colored box in the third row),
then click on 'End-of-day CBOT/CME LDB/Buy-Sell Reports PLUS ANALYSIS...'.
Then click on 'Background'.
Get a two week free trial.
Click on the blue "Free Data Trial" box at the second line of the home page boxes.