Auction Market Value Theory & Analytics

Sure if i could find the time to post like previously. But I am still merely scratching the surface compare to you.

Bandung's new indi built upon his previous work which allows the same parameters to be exported which gives a lot of flexibility. I don't think i have the time to create analysis tools like you do. So I stay with what i have got for now.

Trading less often as i would like. I am still sticking with the basic model & mix of internal balance trend trades within the bracket, with previous day analysis & overall rotation factor performance.

I am alternating with tools from NT7 & that"previous tool" - as long as it last, 3 & 5 days overlay are the mainstay 80% of the time.

I assume now your bread & butter indi is Bandung's new indi? So if you are looking into bracket screen I ass traume that you are not just trading a single forex pair?

I am using a combination of both. The “previous tool” no longer displays for me on the new build, however the data that was displayed does not plot on the chart. But the reference points that were visible on the chart, are still written to the file folder

The data used, to display reference points, comes from a file in the “files” folder. If you look at the files in the folder they contain several days of refpt data. It’s plotted the same in the files as if it was plotted to the chart. I just don’t have the luxury of it being conveniently plotted on the chart for me. I make it work with the flexibility of the new indicator to create the overlays, and I retrieve the “data” from the “previous tool” from the file folder.

Most of my time is consumed with a long term solution. This year I’ve been thrown a few curve balls (MQ build change, FIFO, and now an unexpected transfer of trading accounts). But I’ll get back to the swing of things when I can evaluate the impact of these new set of circumstances.

Earlier it was noted that one effect of disequilibrium is that Auction Market Theory has an empirical base. It will be seen that the tenets of AMT leads one directly to the analysis. Unraveling the details inside a particular market situation draws on both market knowledge and experience. There are many possible Overlay timeframes, for all different markets. The shortest one would use would have at least the most recent market condition in its entirety. The market may be in one of four conditions (balance, transition to trend, trend and transition to balance). The Overlay and Meta Profile structures are universal, bringing the market forces together in a single display. The analyst's task is to read the market from AMT principles and set the strategy for the next day. The basics will all be there, but the reasons for the behavior will often come from experience and market understanding.

Observables are the raw data of Auction Market Theory. They range from prices and their behavior to constructs such as Meta Profile and Overlay Demand Curves. The constructs bring value into the picture. With value in hand, theory development can proceed.

Auction Market Theory Development. The Elements.
Now that the observables and their consequences have been considered, it is time to collect and sort out the descriptors of auction markets. General information brings auction markets into focus; what they are, how they are constituted. This information is the framework for understanding the details of the theory.

Elements of Auction Markets
General
Since financial auction markets are of diverse sorts, some of these general elements are prone to change. The viewpoint here is of exchange based trading. Movement to off-exchange trading will certainly alter the effects of exchanges and members. However, nothing in the forseeable future will change the fundamental way auction markets behave, the way prices are negotiated and the way demand affects value.

1) Future price levels are not predictable.
2) Markets display little day to day serial correlation.
3) Auction market: marketplace in which price is arrived at by negotiation.
4) Double-sided auction markets see activity by both buyers and sellers.
5) Auction markets are not generally equilibrium systems.
6) An auction market's structure is continuously evolving, being revalued.
7) An auction market is in one of two conditions: balancing or not balancing.
8) Demand fluctuates over the day timeframe.
9) Demand change drives price change.
10) Markets generate price data: ticks, open, high, low, close
11) Price ranges are developed by negotiation.
12) Some prices are accepted, some are rejected.
13) Market volume varies day to day.
14) Market range varies day to day.
15) Markets accumulate (balance) and distribute (trend).
16) Markets cycle (phases are: balance, test, trend, test, balance, etc.)
17) A market phase can exist for a short time (minutes) or long (days).
18) Market hours control aspects of trading: openings, closes, initial balance.
19) Heavier trading is seen on exchange opens and closes.
20) Auction markets are traded for short term appreciation.
21) Traders seek value.
22) Accepted prices define value.
23) Value is price over time. P x T = V x constant
24) Value based (price-time) data: Meta Profile, Overlay Demand Curve.
25) Short timeframe trader holding period is from minutes to hours.
26) Longer timeframe trader holding period is days.
27) Longer timeframe traders move markets by accumulating positions.
28) Public day traders and public long timeframe traders seek trends.
29) Long term trending markets are controlled by long timeframe traders.
30) Four types of exchange members (floor, commercials, off-floor, public).
31) Most members seek balanced markets.
32) Most members are short-time frame traders.
33) Electronic platforms clear faster

Hello,
thanks for sharing your knowledge. I am looking into these concepts currently and will carefully study the thread.
Cheers,
k

Meta Profile (MP)
Meta profiles graphically display generally understood market characteristics . A market day displays price change from demand, rumors, aborted moves and trading strategies. Meta Profile displays the structure of the day.

1) Price - volume structure: a day's trading is quasi-bell shaped.
2) Accepted and rejected prices are displayed. Usually they are highs and lows.
3) The TPO is the minimum time for information to be decoded by the market.
4) TPOs developed because of market inefficiency in mirroring demand.
5) The Value Area is easily identified by it's bell shaped bulge.
6) The most heavily traded price is near the middle of the distribution (POC).
7) Volatility is measured by the average range of the half-hourly bars.
8) Meta Profile displays market congestion.
9) Balancing markets are congesting.
10) Pausing trends are congesting.
11) Meta Profile displays Initial Balance (first hour).
12) Demand change is often delineated in 'double (running)' Meta Profile.

The Overlay Demand Curve identifies the phase, the market condition. The Overlay is a multi-day construct. Meta profile is a day structure. It's interpretation requires a larger framework, the phase of the market.

A balanced profile in a balanced market phase would be interpreted differently than the same profile within a trending market.

Overlay Demand Curve (ODC)
1) ODC collects day markets into longer term structures.
2) Demand Curve structure of ODC shows market condition, its phase.
3) ODC development shows continuation or change in phase.
4) Breakout from balance is an alert for trend.
5) ODC shows time evolution of a market with varying length Overlays.
6) Balanced markets define the distribution limits and risk.
7) ODC is Quasi-bell shaped, locates value region and shows price rotation.
8) In trending markets, ODC shows trend components including pauses.
9) The ODC distribution delineates expected and unexpected market behavior.
10) Expected/unexpected behavior leads to "if this, then that" analysis.
11) ODC may contain internal trends.
12) ODC balance may be skewed, indicating non-balance influences.


The Structure is Complete
Auction markets can be analyzed and understood with the elements in the above posts. These elements are the base of Auction Market Theory. Since the theory is empirical it is not falsifiable, i.e. it's validity rests upon it's utility. But markets change and new definitions may be required or old ones altered. Certainly there will be change in the exchange structure if electronic trading dominates. Or, the TPO, which is defined on a 30 minute basis, may move to another timeframe as new methods of information dissimination develop. Such change will not alter the fundamental ways auction markets work.

The elements of the theory are both descriptive and numeric. Facts of auction market behavior are useful for qualitative decisions. Numeric elements are the stuff of hard trading decisions. Numerics are, e.g. the Meta Profile value area prices, the rejected highs and lows; the Overlay Demand Curve limits and risks and theprice of the pause in a trend. The numerics can lead to trading rules

Volatility is a natural part of all auction markets. In CAPM it is the risk, arrived at statistically. AMT is slightly different. Volatility 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 in the day timeframe. Daily trading range does give a gross estimate of market fluctuation.

I appreciate the kind words. My knowledge base comes from a few years of Auction Market "Analysis". However, the 40 years of Empirical studies & research I present here is the exclusive work of Donald Jones of Cisco Futures. Its taken me about 7 years to read & research the 40 years of research & emprical studies of these concepts.

Value Based Trading Research & Reference Material
http://www.cisco-futures.com/references.html

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.
Every trader has, at one time or another, 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".

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 Meta Profile and integrated by the Overlay Demand Curve. 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, Meta 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 Meta Profile.

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 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.

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 brief analysis of the market from the profile:
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: (see picture)

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.

Overlay Demand Curve Defined
A year or so after Steidlmayer's book, this author (Donald Jones) 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' . 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.

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).

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.

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")

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.

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.

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.

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.

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.

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 .

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.

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.

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).

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.

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 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.

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.

Today is a perfect "Text book" example in a break from longer term balance

As is today