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Auction Market Value Theory & Analytics

  • #141
  • Jul 10, 2014 1:45am Jul 10, 2014 1:45am
mzvega, how do you trade?
If you are good at something, never do it for free--Joker
  • #142
  • Jul 10, 2014 2:40am Jul 10, 2014 2:40am
Quoting jmn5611
mzvega, how do you trade?
I trade Auction Market Value Theory as it applies to “Tick based” markets. Using a “Meta” profile & Composite profiles. The concepts are similar to MP, but the concept of “Value Area” differs for the “major auction”. I use different AMVT concepts sometimes. I trade the “major auction”, but position myself using data from the intraday TF. My trades & bias are based on “analytical data”. The profile doesn’t form my bias the data does. I usually only look at charts that are in a state of balance for opportunities. But in a nutshell I trade Auction Market Value Theory as per Jones…………………………
Markets are not efficient, rather they are effective - Jones
  • #143
  • Jul 10, 2014 9:01am Jul 10, 2014 9:01am
Quoting mzvega
{quote} I trade Auction Market Value Theory as it applies to “Tick based” markets. Using a “Meta” profile & Composite profiles. The concepts are similar to MP, but the concept of “Value Area” differs for the “major auction”. I use different AMVT concepts sometimes. I trade the “major auction”, but position myself using data from the intraday TF. My trades & bias are based on “analytical data”. The profile doesn’t form my bias the data does. I usually only look at charts that are in a state of balance for opportunities. But in a nutshell I trade...

Thank you, there seems to be more than one way to apply the data, and I wanted to say if any one particular application makes you more confident when you take/ manage your portfolio.
If you are good at something, never do it for free--Joker
  • #144
  • Jul 10, 2014 11:19am Jul 10, 2014 11:19am
Quoting jmn5611
{quote} Thank you, there seems to be more than one way to apply the data, and I wanted to say if any one particular application makes you more confident when you take/ manage your portfolio.
Let’s see, my best trades are breaks of distribution into trend from the "major" auction. MP & AMVT uses a 70% VA in the intraday tf. (minor Auction).

For the Major Auction AMVT uses the actual distributions (count) of tpo’s to determine one auction from the other. I wouldn’t call it a VA per se. The 3 tpo’s, i.e 5 day composite, determine where the auction begins and end.

However I use the Net Flow Analysis everyday as a guide for by bias. I also use it to manage my open positions. The only thing that “trumps” the net flow analysis, for me personally, is the break of the major auction into trend.
Markets are not efficient, rather they are effective - Jones
  • #145
  • Edited 11:57am Jul 10, 2014 11:39am | Edited 11:57am
Elements of Table 1

Item 6. The central 70% of market activity measures value (value area)

Steidlmayer defined the value area as +/- the first standard deviation of a market profile which is itself defined as a gaussian curve ; hence the 70 percent number (actually a little less).

In this work we do not posit that a market profile forms a gaussian distribution. We do observe a clumping of market activity in the middle of a day's price range. We accept that the central 70% of market activity defines value.

(the fundamental difference between MP & AMVT, the gaussian curve methodology is not an allowed practice in AMVT as the concept belongs to Efficient Market Theory,not an allowed practice, explained earlier)

Value can only be defined in a balanced market. A directional market (trend) has changing value which is difficult, if not impossible to measure in the general case.
Markets are not efficient, rather they are effective - Jones
  • #146
  • Jul 10, 2014 3:47pm Jul 10, 2014 3:47pm
Hi, I'm referring to his studies where the resultant charts look like the image below. (excuse the fact that it's the D Mark...!)

It also relates to his work on the finite type of steps that the market goes through to be found here:

http://www.tedtick.com/downloads/steid.pdf

I think understanding his concept of "minus development" is probably the most $$$ rewarding.

Cheers,
Attached Image (click to enlarge)
Click to Enlarge Name: Capflow.PNG Size: 35 KB
  • #147
  • Edited 8:27pm Jul 10, 2014 5:31pm | Edited 8:27pm
Quoting Hyperion
Hi, I'm referring to his studies where the resultant charts look like the image below. (excuse the fact that it's the D Mark...!) It also relates to his work on the finite type of steps that the market goes through to be found here: http://www.tedtick.com/downloads/steid.pdf I think understanding his concept of "minus development" is probably the most $$$ rewarding. Cheers, {image}
It’s the same concept found page 117 steidelmayer on Markets.

It’s about the best detailed info I’ve come across on the subject………….

The colorful chart you posted is the same concept as found in the book example, the old version is depicted in your attachment also. It’s colored up and given red light green light signals (to keep its proprietary).

I find steildlemayers explanations difficult to grasp. It takes volume of one bar and counts the excess volume above & below the previous. While it ignores the middle data. I don’t trade volume based markets so it’s of no value to me personally. So I cant say I've used it. But you could call it "Volume Excess"

I have used the same concept as it applies to AMVT by using tpo's. Jones applies similar methodology (without dependency of contract volume) called “Congestive Market Timing: The Run-Pause Profile”. In a nutshell it’s an expanded profile that determines congestion areas with a tpo count.
Markets are not efficient, rather they are effective - Jones
  • #148
  • Jul 10, 2014 5:52pm Jul 10, 2014 5:52pm
Thanks for the info. His work is in my opinion the most mis-understood and under rated of anyone's work in understanding the markets.
Then again, like the Sufi looking outside his tent for a lost key because it's lighter outside and he can see, most of us see the truth and dismiss it as too hard!
  • #149
  • Jul 10, 2014 6:25pm Jul 10, 2014 6:25pm
Quoting Hyperion
Thanks for the info. His work is in my opinion the most mis-understood and under rated of anyone's work in understanding the markets. Then again, like the Sufi looking outside his tent for a lost key because it's lighter outside and he can see, most of us see the truth and dismiss it as too hard!
No problem, thanks for posting.
I may not trade MP, but I have a love of all things AMVT related.
Markets are not efficient, rather they are effective - Jones
  • #150
  • Jul 11, 2014 8:52am Jul 11, 2014 8:52am
Elements of Table 1

Item 7. Markets display a run, pause, run, pause price pattern
Run, pause price patterns are observed. This will be demonstrated in the section on profiles. The run, pause pattern is most likely a look into the decision process of the collective trader, with it's uncertainties on display.

Item 8. A trend is the 'run' portion of a run, pause price pattern
Markets spend their time in either one of two states (trend (run) or balance) or in transition between the two states. Runs, pauses and balances will be demonstrated in the profiles section. A run may include one or more pauses.

Item 9. A balance is related to the 'pause' portion of a run, pause price pattern.
This is the same concept as for Item 8. The pause itself demonstrates an uncertainty within the collective. A run terminates when a pause lengthens into a congestion. A congestion is recognized within the constraints of the current market--it is a balance period substantially longer than the initial pause of a few seconds or hours.
Markets are not efficient, rather they are effective - Jones
  • #151
  • Jul 11, 2014 9:11am Jul 11, 2014 9:11am
Elements of Table 1

Item 10. Trends and balances are defined within the context of particular time frames

Markets display a limited fractal nature. Self similarity is seen intra-day and day to multiple days. In the futures data we use, the self similarity typically disappears after about 15 days. Intra-day, the fractal resemblance of one time scale and not another may go down to 10 or so minutes. This behavior is most likely market specific so far as the timing is concerned. It is not unusual for a market to be trending on a 3 day basis while balancing on a longer term. There are at least two scenarios: A market may be in balance on several time scales, say 20, 14, 8 and 5 days. A trend may begin in the shorter term period and continue to move through longer and longer time balances, until all four timeframes are directional. Or, secondly, the short timeframe balance is broken, the market is directional on the short timeframe only, the trend stops and balance is restored to the short timeframe, while the longer timeframes remain in balance through the entire process.

Limitations
As in all empirical systems, there must be adequate observations to offer an valid measure. Typically, something like 100 ticks are needed for each 30 minute period to have adequate liquidity; about 1000 ticks per day is a reasonable minimum. Less activity may still provide adequate liquidity, requiring a judgement call on the part of the analyst.
Markets are not efficient, rather they are effective - Jones
  • #152
  • Jul 11, 2014 12:08pm Jul 11, 2014 12:08pm
Discussion

Table 1. is not necessarily the final word on the basics of auction markets.

The scientific, observational/empirical approach recognizes that there is usually more to be learned and future work can advance the state of knowledge. Auction Market Value Theory is what it says, a theory. As in any valid scientific theory, it is "falsifiable", meaning it's elements can be tested and may be disproved or modified. As with any scientific study, Table 1. is offered as "where we are now". The nature of science is to constantly question findings and assumptions, revising and deepening the understanding of the phenomena. Particularly, unraveling market behavior and structure in the presence of human psychology holds many challenges and possibilities.

Unlike other ways of analyzing markets, the empirical method may appear somewhat lacking. Some methods try to 'know' things about the market based on supra-market information; items like value, direction, reasons for a change in direction and even predictors like, e.g., Elliott waves. Unfortunately, the predictors tend to be of the sort "the world will end tomorrow". Then, when tomorrow comes and there is no end, that necessitates a "recalculation". A case of this sort may have occurred in Elliott wave in 1987. The huge October 1987 crash was seen as the end of a stock market cycle begun in 1932; the peak of wave 5. When the market quickly had a strong recovery (no, the world did not end), waves 1 through 5 had to be re-evaluated. The low on Oct. 20 (SP = 181) has been followed by a generally rising market (by August 2005 the SP Index was above 1200).
Markets are not efficient, rather they are effective - Jones
  • #153
  • Jul 11, 2014 12:19pm Jul 11, 2014 12:19pm
Auction theory has the modest goal of understanding a market on the basis of it's behavior. Since auction theory does not predict future behavior, it is easy to question the theory's utility. One answer lies in the Practices. With a proper theory, one may discern which practices are permitted by the theory and which are not. One is offered the correct path, avoiding many meaningless or incorrect, costly detours in market analysis.

As discussed earlier,'Know your business' is an appropriate dictum in any business, and certainly so for auction markets. For example, current value offers a marker for value change. Knowing that current value is changing offers information on directionality and what to look for, i.e., the onset of congestion. Compared to predicting the market several years out, attempting to understand current value may seem mundane. Getting a better price for one's product by understanding value is the very spirit of markets and hardly mundane. An old Russian proverb is apropos: There are two fools in every market: one pays too much, the other sells too cheaply. The one who knows value gets a fair price (or better!) and is not the fool. To a fund manager who must rebalance a portfolio, it would be attractive to sell the old equities near their highest price of the recent few days and buy the new equities near their lowest price of the same period.
Markets are not efficient, rather they are effective - Jones
  • #154
  • Jul 11, 2014 2:05pm Jul 11, 2014 2:05pm
A difficulty not present in the physical sciences is that auction market data has a strong psychological component. Price varies with the trader's perceptions. Those perceptions are reflected in the market feedback; volume, the tick flow or other short timeframe measures. Decoding the market activity reads the collective trader's mind. That mind may change, often not depending on (real) value but on fear and greed. A trader who can understand the market's feedback is in a far better position than one who cannot.

Another characteristic of auction markets is a time delay in a market's response to a pulse of activity. Feedback from the widely scattered agents/traders takes time: each trader acts within his/her own interpretation of the market action and within his own timeframe. In a market driven by feedback the time to respond is variable depending on the impetus, but there is a norm, an average. A relaxation time, on average, can be found. For markets studied to date the average relaxation time is of the order of 30 minutes, but that obviously can change with market phase and local conditions.
Markets are not efficient, rather they are effective - Jones
  • #155
  • Jul 11, 2014 3:09pm Jul 11, 2014 3:09pm
Much of market econonomics has developed from defining general truths or 'authority' and then continuing to build from there. It is hard to argue with a general truth, as the behavioral economists have found. Starting from scratch with the data, and developing a knowledge base piece by piece has the advantage of being testable. This, and not relying on "general truths", is the scientific approach.

Auction Market Value Theory (AMVT) is a relatively new concept. It's true utility as an economic theory is yet to be gauged. What can be said so far is that the methodology is consistent and opens new avenues for analyzing markets. It is helpful to practitioners by uncovering market structure. AMVT gives a sense of the wide range of subjects it treats: the market psychology of a panic, how the market creates "units" of balance - directional - balance, etc., an examination of waves, market response times, efficient versus effective market activity and many others. A wider and continually growing list can be found.
Markets are not efficient, rather they are effective - Jones
  • #156
  • Jul 12, 2014 10:59am Jul 12, 2014 10:59am
Appendix 1. Discoveries
The Three Major Auction Market Discoveries of Auction Market Value Theory

Donald L. Jones
November 22, 2005
CISCO Futures

Three discoveries form the foundation for practical auction market theory and practice. These are

1) the Market Profile,
2) the Meta-Profile and
3) the Overlay Demand Curve. (Composite)

The first discovery, Market Profile, found the analytical link between volume and value, plus developing an activity graphic; by using a daily trading audit data base released by the Chicago Board of Trade. This data base, The Liquidity Data Bank (LDB), carried each future traded at CBOT on an end-of-day report, listing for each price, the volume and times traded.

Meta-Profile identified the analytical link between tick activity and value. Source data for Meta-Profile is a record of trades or ticks, either real time or historical. In addition to value, an activity graphic similar to that found for the Market Profile, can be constructed from the tick data. Meta-Profile opens value analysis to all tick producing markets, futures, forex, options, equities, etc. Time frames for analysis can be adjusted for day markets, for night markets or a combination as desired.

Thirdly, the Overlay Demand Curve extends Meta-Profile value analysis to multi-day timeframes. Longer timeframe value is found from frequency of ticks over the extended timeframe, just as with the daily Meta-Profile. Overlays are notable for identifying market condition, locating those times of balance, the periods of directionality and the transitions in between.
Markets are not efficient, rather they are effective - Jones
  • #157
  • Edited 1:21pm Jul 12, 2014 11:21am | Edited 1:21pm
1) The Market Profile

The seeds of value theory were sown by an unlikely event in practical market analysis. In 1985. J. Peter Steidlmayer, a well known member of the Chicago Board of Trade, revealed that his trading basis was value, not price. But his value is not the long term value sought by the economic fundamentalists. It is value discovered from one day's trading and changes daily in response to market forces. Steidlmayer's value comes from calculating price-over-time. He offered it as an algebraic formula: value = price + time. Dimensionally, price and time are not compatible. The formula means that acceptable (fair) prices will be traded more than unfair (too high or too low) prices. Over a day's trading, volume at price will show which prices are accepted by heavy trading and which are rejected by light trading.

Information from the Market
Steidlmayer observed that a price - activity chart often "looked" like the well known bell curve, or a normal (gaussian) distribution. He chose the bell curve for his model of market activity.

The CBOT Liquidity Data Bank (LDB)
Steidlmayer was instrumental in creating the Chicago Board of Trade Liquidity Data Bank report , an end of day audit of all trading on the exchange. Every future at the CBOT listed volume and time at each price. The LDB report format included the bell shaped "profile" of trading. This is a graphic showing the trading at each price, as identified by "time", breaking the day into half-hour reporting periods of exchange cleared trading.

The sample LDB report in figure 1 shows both the Market Profile graphic, the cleared volume at price, and the value area (70% VOLUME SUMMARY). Included are the distributed volumes generated by the four classes of CBOT members (%VOL, %CTI1, 2, 3, 4), which are not involved in profile analysis.

The Market Profile Graphic
The bell shaped curve, the Market Profile (BRACKETS in the LDB data in figure 1), peaking around the middle prices, could give one a sense of the center of value. This is a "qualitative view", a chart of activity at price over time.

However, in the Market Profile construct, value is centered at the peak volume price. By "analogy" with the assumed bell shaped, gaussian distribution, Steidlmayer defined a 'value area' as the first standard deviation, the middle (approximately) seventy percent of the posted volume on the CBOT LDB report .

While a profile (graphic) is defined as the "temporal distribution of trading activity"(TPO's), located by cleared price at time,……... the value area is defined by cleared volume.

The intermingling of these two concepts has caused confusion. Observationally, it is often true that the center of volume based value is near the center of "trading activity" (see figure 1, below). The general agreement between center of value and the peak of the Market Profile can fail in markets that are moving from balance to directionality or vice versa .



Figure 1. Liquidity Data Bank (LDB) Report for CBOT Dow Index, Nov 28, 2000.
Columns of interest: 1 is price, 2 is cleared volume and 8 is the Market Profile graphic (BRACKETS). The letters in the BRACKETS column, (called TPO's), represent 1/2 hour timeframes, or mini-days. Z is the period 07 to 07:30, $ is 07:30 to 08, A is 08 to 08:30, B is 08:30 to 09, and so on, with the TPO 'O' covering from 15 to 15:30. The lower part of the display entitled '70% VOLUME SUMMARY' is the 'value area' will be discussed in the section 'Steidlmayer Volume'.
Attached Image (click to enlarge)
Click to Enlarge Name: figure 1.JPG Size: 198 KB
Markets are not efficient, rather they are effective - Jones
  • #158
  • Edited 1:29pm Jul 12, 2014 1:07pm | Edited 1:29pm
1) The Market Profile
Figure 2. Profile Structure.

The 'Initial Balance' is typically the range of the first two trading periods of the day, here it is yz, 07:00 to 08:00, although the length can differ from market to market. Initial balance is ascribed to the professional traders dominating the market and seeking a 'safe' trading range for the day. Trading outside the initial balance is called a 'Range Extension' and is considered a breakout of sorts. Single TPO's at the top or bottom of the range are named 'Tails' so long as there are at least two single prints. Tails indicate excess, the market having auctioned too high or low and thus experiencing quick rejection.

Steidlmayer also categorized a number of shapes of profiles; neutral day, non-trend day, normal day, normal variation day, trend day and two-part day, each signifying trade offs between short term and longer term traders. He devoted a chapter in his 1989 book to the 'Steidlmayer Distribution' for analyzing markets as they develop. The fundamental concept is that profiles display a normal distribution and that knowledge can be used to understand the "present tense development of an ongoing distribution".

Another element of the Steidlmayer analysis is discrimination between the short time-frame traders such as exchange floor members who must trade regularly each day and long time-frame traders who are more selective and active in un-balanced markets. This was tied into day-types.

Steidlmayer's Value
A single day's value is 'local', guided by the events of the current day. Steidlmayer defined value in terms of the volume in the audit data of the Liquidity Data Bank. Referring to figure 1*, volume is the second column. The definition of value is the price range encompassing seventy percent of the cleared volume, centered about the high volume price. This is the "first standard deviation of volume".

*distributed volumes generated by the four classes of CBOT members (%VOL, %CTI1, 2, 3, 4), are not involved in profile analysis.
Attached Image (click to enlarge)
Click to Enlarge Name: figure 2..JPG Size: 57 KB
Markets are not efficient, rather they are effective - Jones
  • #159
  • Jul 12, 2014 3:44pm Jul 12, 2014 3:44pm
Putting Things in Perspective

Steidlmayer understood that he was locating the significant price areas where traders were "using or not using the market" . With his belief in the bell curve theory of day market structure, the concepts of value (+/- one standard deviation), acceptance (heavy trading) and rejection (light trading) were built. This was long before the econophysicists proved the market distribution function was (mathematically) complex, self regulating and driven by feedback. Steidlmayer was using the feedback, the "market's voting", to generate the profile, the shape of the trading. Value, of course, came from the audited volume, centered at the high value price of the day.

When the works of the econophysicists appeared it became clear that the Market Profile and later, the Meta-Profile, were decoding the market feedback. This led to the realization that "profile methodology" was a fundamental element in auction market analysis.

Notwithstanding the limitations (CBOT LDB (audit) data and end-of-day only), the Market Profile and the value area will probably be seen as the outstanding discovery in auction market analysis in the twentieth century. In one leap of insight, Steidlmayer found a way to measure current market value. The utility of (profile) value became clearer with the work of the econophysicists who demonstrated that the accepted Capital Market theory of the economists rested on an untenable (gaussian) distribution function. If, as proposed by the econophysicists, the market is complex, self regulating and driven by feedback then the market can not be described by any mathematical "distribution function". Consequently, market generated data is the only known foundation for market understanding. Only market data can be used to explain market behavior. Profile methodology is the only tool so far found that decodes the market feedback. And value, not price, guides the way.
Markets are not efficient, rather they are effective - Jones
  • #160
  • Jul 13, 2014 2:31pm Jul 13, 2014 2:31pm
Next the the fundamental differences of "Meta- profile" compared to MP
Markets are not efficient, rather they are effective - Jones
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