Auction Market Theory and Market Profile

I simply do not understand the whole discussion.

Market profile and determining value is all about the thesis, that price goes back to value. Other people like me call it mean reverting.

Around value, market is consolidating (giving to that area even more value, since a lot of trading is done there.

In zones of "no-volume", market is in imbalance. Zones of high volume and zones of formerly low to zero volume are the ones, we have to pay attention to (even when you are using religiously AMT and MP)

When market is trending, it will run away from the area, which was thought to be value, because traders agree now on more (or less) value.

On a higher TF you can see, that the market is trending (there seems to be not much (or no) mean reverting or partially mean reverting) between point A and point B.

Looking at smaller TF's, you are able to see between A and B "micro" consolidating zones (forming eventually Gaussian distribution)


Markets are fractal: what is on one TF a mean reverting procedure, is on a higher TF simply "white noise".


I had a nice discussion about that with PipMeUp on the other thread I mentioned this morning.




Another thing: auction market theory and market profile do handle the data with arbitrary chosen durations, like the 1-day, the 5 day or the 20 day profiles.

For me, those static considerations do not serve the active markets we are in today, with Forex open 24/5 or 24/7 (interbank).

So the big challenge is: when to start and end one profile? To say, I use the static one day comes obviously with many shortcomings.

Market profile uses TPOs as a way to organize "data" for Auction Market. Once the data is organized. You then you analyze the your data(TPO's). You don't trade the picture (indicator). TPO counts above & below the (TPO) VA, tell you if there is an imbalance of buyers or sellers. Single print tpos analysis tell you if the auction to the upside or downside is complete. tpo counts above & below value tells you if there is more longer TF participation above & below value. TPO analysis within the IB tells you if trading is dominated in public or institutional control etc. You monitor this market generation data for change and it tells the condition, and sentiment. Auction market analysis is about analyzing the data produced by the indicator. All this data is contained in the one indicator.

But I think you guys are really on to something, I guess its just a lot easier to use 30 different chart indicators to attempt to extract the same 30 AMT references found in one MP indicator. So much simpler than doing analysis. Its obvious this thread no longer has any interested in "analysis" of MP data. With that said, there's nothing more of value that I can possibly contribute. I joined this thread to discuss Auction Market Theory & Analysis. Ill leave you people to your legitimate comparison of MP to other statistical approaches......

What can I possibly say to all that..........I use Auction Market Analysis to interpret the auction process. There is no system.......I came here to discuss Auction Market Theory with others who use the same approach. It sounds like you have a lot more to offer this thread on the subject of Auction Market Theory...........there's nothing more on the subject that I can share I havent shared already. I leave here knowing others are in good hands........wish you all good trading

you are religious about that!

You are so religious about that, that one can not even discuss points of view here. So you should not complain anymore, that participation rate in this thread is so low.

You turn discussion into a polemic battlefield. Neither me nor Svengralla has mentioned, that we make use of many indicators (and was not even a topic here). It is you who thinks, that someone can make a decision of 40 different topics by analyzing the market profiles. But it is me who can make a profound decision by only looking at the VPO or volume distribution and an arbitrary momentum indicator.

Good point.
I liked this discussion, because it boiled things down to the essence.
Thanks to all.

(Mzvega,with all respect, but you take this discussion personally, don't you?
As far as I'm concerned, I don't intend to post in this thread regularly. It's all yours.)

Sorry, go back to page one of this thread and read the thread title:

it states: Auction Market Theory and Market Profiles

You are trying to sell here the religion of ONLY ATM



Since the foundation of ATM is clearly Market Profile, I can see here not the point, where I have said something wrong or inappropriate.


If that all is not good for you, simply open up another thread, which may be named:

"Only ATM - do not look left, do not look right"


I thought it was fun and maybe enlightening to take a view over the table and discuss concepts


You certainly can stay here, because I have my own threads and do not need necessarily a third playground.




Crazy people here in FF

Actually, in the pits of the futures trading, there used to be a bell that rang every 30 mins. Auction Market is based on that ringing of the bell. Weird.

You are correct on the assumption of VWAP. They DO use that to determine value, however, a lot of the big institutions use indicators (to my surprise as well). I do know a few pro-traders that do.

A few years ago I had a chance to walk through a trading floor at a LARGE bank and to my surprise, everyone was using the same indicator. From then on, I changed my thinking and the AM Theory helped me to really understand the markets.

I dont know how you guys can post so many times. Most of my day is looking at the markets.

Really, there was a bell ringing every 30 min? Did not know that. Interesting LOL


Two friends of mine are quant trader at a big German bank. They confirmed the VWAP-thing, too. Pivot point's and their derived S/R-levels are also used very much. I think you meant that indicator?

What do you gain by looking at market, so to say, 24/7?

I can even do my work in between

Interesting.
Could you go a little bit more into details, please?
Must have missed these points when reading MOM.

That very first page cites but one name beside that of Bandung, among the participants in this thread, and that name is Mzvega's.
There must be ar reason for that. I have almost finished reading the whole thread and she is by far the one whose contributions are best researched and can benefit a student of AMT/MP.
Now, it is true we are free to take whatever we feel okay with and live the rest of the theory to purists, provided we find success with our indicators "composite".

I agree with you. I dont know why you quoted me.

Without Bandung none of these indicators would have been possible; and with mzvega's contributions, her contributions have been valuable to say the least.

Happy trading.

You are right, Smtm. This is the passage from Infinitus that I was reacting to:

"Sorry, go back to page one of this thread and read the thread title:


it states: Auction Market Theory and Market Profiles

You are trying to sell here the religion of ONLY ATM"

My apologies, I did not intend to quote you

As to this said, you might be right, howevere I found if the price is about to be trending and crossover the first standart deviation in the choosen direction afterwards, the price will not come back to the vwap line all the day as a result. Using AMT and some elements of the MP concept I have been formalizing the price behavior in the intraday picture (in the proces of price unfolding).

Yes, it is mostly.


Statistically you are right. However the market is irrational, and the edges of 1, 2 and 3 sigma (the vwap line is as well) give us the support and resistance lines, which act the more strong the more trending day there is.



If we see a trending day, the gaussian distribution becomes skewed assimetrically (of course it is not gaussian now), but the edges of standard deviations are still workable as said above.

Golden words indeed.

Guys (Mzvega and Infinitus) I have been reading your hot discussion and I have just found that the most correct words here are the quoted above. There should be here said "Ameen" then.

I do not really understand why are you arguing? There are AMT and MP - the fundamental concepts to be studied. There are other concepts that are (or not) based on the MP and/or AMT to use for - they are all about making money. That is it, there is no need arguing about it, guys. Take the concept you want and trade using it.

Can not agree more!

Amen, amen, and amen

Cisco-futures
“Auction Market Value Theory is, we believe, the first comprehensive theory of auction markets. Economists for long have held to the Sharpe-Markowitz Gaussian distribution theory for equities (Capital Market Theory, or CAPM). Their idea that the market was an equilibrium structure has proved wrong.”

If AMT has proved through data & analysis, that Gaussian distribution theory in financial markets is wrong, it would go against AMT basic fundamental principles to think that it does.
So as long as you talking Gaussian distributions and reversion to mean type strategies with no regard to the data (facts), it will never have anything to do with Auction Market Theory or Analysis. And if that makes me a “religious fanatic” & “crazy” so be it.

You can put “lipstick” on that assumption, and sell to other people in another thread who don’t know any better, just not to me.

And as for me selling only AMT, why not? It applies to tick based markets. Let me guess, you would prefer that I sell MP methodology that’s exclusive and only applies to CME, and not FX?

Just because you bought into it, put some “lipstick” on tick volume indicator and try to pass it off somewhere else as MP somehow being related AMT, doesn’t mean I will.
When your Gaussian/tick volume distributions can tell me if there are more buyers than sellers in the market, who’s in control, how much long term interest is involved, where and by how much, then I might view it as “comparable”. Until then I’ll stick to TPO profile which is the “standard” for the industry. Until then, it doesn’t matter, what your doing has nothing to do with Auction Market Theory or Analysis.
Whether the profile is static or not is irrelevant, again you’re looking for patterns and choosing to ignore the “data”. The data tells you where the “auction” begins & ends. AMT It’s not about trading the picture of indicator, its trading the “facts”.
I’m not saying people can’t form trading strategies with distributions reversion to mean type strategies and be profitable. It just has nothing to do AMT, you can’t even begin to compare it…………..

I don’t have think, its statically proven, I don’t think, I just "do". Can your "profound" decisions devoid of the facts of do the same? Care to share statistics of your "profound" decision making methodology?

If all it takes a little effort and analysis to trade in the right direction at least 80% of the time I'm good with it. I get back what I put in to my analysis

The full study :http://www.cisco-futures.com/daytrad..._example2.html

Hers's is an article that helps others in the distinction between MP & AMT......................................

CISCO
37 Years of Excellence in Auction Market Research

CISCO Futures
1-303-306-1521 1-800 800 7227 Fax 1-303-306-1572
http://www.cisco-futures.com
[email protected]

Dialogue on the Two Systems: Holism and Objectivism
Market Profile versus Value Based Analysis

Donald L. Jones
Copyright CISCO Futures 2007

Subscribers to the CISCO Short Course for daytraders are permitted a 15 minute question session per week. This dialogue between student and teacher concerns the fundamental principles of Market Profile as initiated in the CBOT Market Profile manual, 1991; contrasted with the Value Based Analyses developed by CISCO. As such, this discussion is of general interest to all traders and is shared on that basis.


Student:
Refer to SF8 Nov 13 2007 Market Profile, what is the open type? (open-test or open-reject-reverse).

Refer to SF8 Nov 14 2007 Market Profile, market had a open-drive day. G bracket registered the strongest move after initial balance and with extensions.

Teacher:
Where in our lessons do you find "open-test" or "open-reject-reverse"? This sounds like it came from Mind Over Markets, 1990. MOM is a reference we give, along with CBOT Market Profile 1991. Profile trading, as introduced by Steidlmayer and clarified to some extent by MOM is pattern recognition and holistic interpretation of what you see in the profiles. The Dalton group's new book, Markets in Profile, 2007, is even more holistic than the earlier two.

I initailly tried the holism path and found it impossible to read the market objectively. Steidlmayer knew the players personally in the pit. As an intelligent observer he could figure who was in control, etc. I doubt that he could do that in todays electronic markets.

So, by 1987 my path diverged from holism to objectivity. First I found that value area, by the CBOT definition, could not be calculated for any but CBOT markets. I researched the TPO value method and that is now the standard for the industry.

Next I realized that one day's profile could be understood only within the context of the market as a whole, i.e. the Market Condition. That led me to develop the Overlay Demand Curve to determine whether the market is in balance or not. The critical point here is that the reference points used in the holistic interpretation, such as value area, are NOT valid unless the market is stable, i.e. in balance.

Remember, the basic premise of market profile, the foundation, is that the bell shaped price-volume curve forms a gaussian distribution and value can be found (defined) as the first standard deviation of that price-volume distribution. If the price-volume curve is not bell shaped, obviously it is incorrect to apply gaussian statistical analyses. Since bell shaped price-volume curves only occur in balanced markets, it is necessary to have a tool, like the Overlay Demand Curve, that identifies balances. (Read the new article in the References Section of our site 'Three Day Balance Rule'.) Even in an overall 5 Day Balance one or more days may fail the bell-shape test.

So what our course is about is an objective, scientific use of the data. We identify balances and generally require that the data we use in our analyses are valid for the their application. This is admittedly more restrictive than reading patterns, but it is repeatable and not biased by the observer. Our starting point is 'data validity' for the job at hand, whatever it might be.

Many of the profile reference points offer valuable ways of interpreting the data, SO LONG AS THE PRE-CONDITIONS FOR THEIR USE ARE MET. Obviously, if you are beginning with a market not in balance, not meeting the pre-conditions set by Steidlmayer/CBOT of a bell shaped, gaussian distribution; then your subsequent interpretation of the meaning of the reference points is in doubt.

The real danger, as I see it, is that we have come to expect too much from each piece of data! Our ideal is to take a reference point, say value area or initial balance, and predict the coming market activity; or to be able to compare one day's value with the next to explain and project the market's behavior. This is our most fervent wish, but reality throws doubt on this premise. If we could read markets, as demonstrated by Steidlmayer in CBOT Market Profile 1991, we would hold the keys to untold wealth. Reality says "you are in a complex environment and it is highly unlikely that any one or two market elements will insure your success. (In fact, with Value Analytics we typcally use some 15 reference points as flow variables, summing over three days to find internal directionality, market bias, etc.)

You illustrate that ideal wish in your next question ('the low of G should hold').


Student:
What are the odds that G bracket low would hold for the day? I reason that the big boys started the move in G, so the low of G should hold. Is this a flawed reasoning? Or only valid in open-drive day?

On the same day, the profile has a P form structure. Market managed to close above the Auction Point (F bracket extensions) and on Nov 15 it opened at 1074. Normally selling on this day in the opening has brought handsome profit but not on Nov 15. According to Steven Hawkins if the market closes above Auction Point, the big boys might defend their position at least the first one and a half hours next trading day and that was what happened on Nov 15.

Teacher:
Your reasoning is of the sort that makes the profile so attractive. If you can achieve the predictability and understanding ('odds that it will hold') you wish for, and Steidlmayer tends to show in the CBOT Manual, then you are a master trader, indeed.

Data unfit for the job may still give you a positive trade (trading blindly offers a 50 - 50 chance of picking the right direction). So you tend to believe the invalid data when it works and feel that the wrong trades are because you lack something in interpretation. This psychological bind affects many traders using moving averages and oscillators and other invalid methodologies. The "if I had just..." sets in, when in fact it is the method that is flawed.

The P, b formations are a case of the melding of the holistic and objective approach. These formations often do illustrate overbought/oversold situations. They look like what they mean. A market ran up (or down) strongly and then ran out of demand. Traders in on the move are pleased with their quick profits and are loath to jump back out. So the market congests until enough traders catch on that it was short covering or long liquidation, not continuing demand.

A word on the 'big boys'. Back in the 1980's and earlier the trade (locals, commercials) had more money than the public. That has changed. The public now has much more money and can drive markets like never before. It used to be that the commercials were 5 or ten percent of the trade. But they could move the market because of their ability to place a big trade at a market tipping point and drive price. Today, the electronic market commercials make up maybe 40 percent of the market. It seems that these 'commercials' are the hedge funds and no longer a monolith like the commercials in the pit. The 'big boys' of today appear to me to be behaving largely like the public and are not the fearsome monolith of before.


Student:
Compared to my other successful trades and all the times market either close below Auction Point or no range extensions in P form structure right at the top. Is Auction Point a valid condition for this type of setup?

The purpose of these questions is that I like to have a reason for my trades, win or lose. I was long on Nov 13 at F bracket 10536 stop 10514 reckoned a open-reject-reverse day and got out near the high. On Nov 14 I missed the trade when market retested G bracket low just shy of 1 cent from my working order. On Nov 15 I sold in the opening with 5 cents stop 1 cent above Auction Point and I got stopped out in D bracket. I re-entered to sell in E bracket when market broke 1073 stop just 1 cent above previous day Value Area Low at 10746. The trades partly based on P form at the top as well as TCP single print from 1059 to 1073 and my second trade got stopped out too then I called it for the day. And I need your experience and long observation of market profile to guide me on the reasons I have concocted.

Are these sound or simply flawed?

Teacher:
By Auction Point I assume you mean Point of Control (POC), the high TPO price. Once again we come to the door of data validity. Is a one-day measure of POC reliable? The answer, 'not always' is easy to demonstrate a failure. Imagine a market that opens and trades up one price tick each half hour. At the end of the day the profile is a straight, slanted line with one TPO for each price. Where is the POC from which the value area calculation is begun? There is not one. So value is not defined.

Another approach is to examine the profiles that are elements in a balance. For example, in the five day period Aug 30, 2007 to Sep 6, for UU:
Date VAU POC VAL
Aug 30 146675 146200 145825
Aug 31 148075 147650 147300 VA above Aug 30 ? Is this a trend up?
Sep 4 149525 148725 148325 VA above Aug 31 ? Is this a trend up?
Sep 5 147700 147450 147200 VA below Sep 4 ? Is this a trend down?
Sep 6 148200 147925 147600 VA within, ends above Sep 5

In this five day period, the profiles and value area are all over the place. Following the POC movement would mostly keep you out of sync with the market. But, this is a 5 Day balance! Groups of three days usually show balance for each balance group. Day-by-day measures are quite often invalid for trading guidance the next day.

It is as easy to find a balance period comprised of quite well behaved profiles. The point is that both types exist and relying on a simple rule 'if the market closes above Auction Point....' may work part of the time and part not. You must know your data well enough to know if you can rely on simple rules that can be devised for well-behaved markets or not. One way you can keep track is from the volatility for your market. This is listed on the Visual Graphic display. Over a period of time you can come to know what high volatility is. If you are in a period of high volatility, the simpler relationships that work for quiet markets are unlikely to work now.

As noted, I am doubtful about recognizing patterns such as open-reject-reverse days and the like. Is there proof that such patterns are meaningful and more, that you can recognize them on-the-fly? Presumably, a database study of many open-reject-reverse cases could be made and then you have experimental proof of the methodology, win or lose. But could you devise a hard and fast criterion for testing? Would you have to employ a 'valid data' rule that would cause you to discard some cases where the pattern exists but the data does not support analysis?

Defining 'Day Type' illustrates the holism problem. Day Type is a starting point in the Market Profile scheme for profile analysis. The analysis begins by recognizing the profile form (day type) which tells you who is controlling the action (short time frame or long (other) time frame).
In the words of Mind Over Markets, pg 19:
...Market Profile as a whole tends to fall into readable patterns in the day timeframe, determined by the degree of involvement of the other timeframe participant. These patterns, when properly identified, can increase the day trader's success, as well as provide information regarding what the market is trying to do in the longer term.
CBOT Market Profile, 1985, listed three day types. CBOT Market Profile, 1991 had four. Steidlmayer on Markets, 1989, lists six. MOM, 1990, has nine. Steidlmayer on Markets, 2003, lists five. Markets in Profile, 2007, does not have an index item for Day Type! The primary writers in the area do not agree with each other or even themselves on the number of basic day types that exist. So, how many day types are there really?

My answer: there are as many day types as you want to develop. That is one of the problems with pattern recognition. Your patterns may be different from the next person's. If the patterns are arbitrary, dependent upon the viewer, where is the foundation, the consistency?



Advice:
First learn what we are teaching. Be objective about the market's data and how to be sure that it can be reliably used. Go back and read the article 'Three Day...'. Understand Market Condition. Learn the role of profile reference points in understanding the finer points, the internals of markets. Spend time on Value Analytics, it puts the Market Condition and profile reference points into context.

After you understand the data, the hard facts, then include your own experience. Do not blindly believe anyone else's experience without validating it yourself. If you cannot validate it, you cannot use it intelligently. Stick to what you know and can prove. Probably every good trader has a base of specific knowledge, learned in the trenches. This can lead to some holistic decision making, but that holism is based on hard facts (understanding the data) and personal experience.

CISCO's role is to teach you the hard facts of validating futures data and to help you sort the wheat from the chaff. We provide you the analytical tools for the job. Understanding your market and the use of the tools is critical. However, your trading expertise comes from you, not CISCO, not Steidlmayer.

Best regards,

Don Jones