Auction Market Value Theory & Analytics

The Balance Phase
A balance may may be completed in a few days or may continue for many days or weeks. Over time, the balance range (support/resistance) may change slowly as the market responds to low level changing demand. A surge in demand will cause price to exceed the balance limits, causing a breakout.

The Directional Phase
Increasing demand drives the market directionally, e.g. in a trend. During the directional phase support/resistance is poorly defined. As the buying/selling pressure decays the trend loses steam and price movement slows. This effect is measurable as an increase in congestion. Directional markets often pass through several such slowings (pauses) until the final congestion grows into a new balance.

Details of a Market Unit Development Auction markets are complex systems. The path taken yesterday to go from price A to Price B will most likely not be the same if price goes from A to B today. A trader would like a simple rule, e.g. key trades off volume. But there are a number of important factors (called reference points), several of which may be the key factors at one time and different ones at another time.

The complexity of markets suggests that the path from balance to run to balance might be complex itself. That is the case. An example path could be:

..Balance
..Internal rotation as the balance is maintained, point of control is stable, etc.
..Volume increases, internal rotation speeds up, trade facilitation is better (smaller)
..Price breakout from balance--maybe a run has started
..Price reverts back to balance (this was a false breakout)
..Price breakout from balance again
..Volatility increases, volume increases, value area is moving, etc.
..All this helps comfirm the run
..At some point the reference points ease off, value is steadying; the move is slowing
..A short, intra-day pause is seen (is the run over?)
..The pause is three days old and a balance cluster is clearly forming
..Point of control is in the middle of the distribution
..A new Balance has started

This is one scenario of many. It is the general outline of the market's behavior that is important. Run-to-pause-to-run-to-pause is a characteristic of auction markets. A trader needs to be able to recognize the outline as it develops. There are objective measures of balance (the Overlay methodology). Much of the decision making comes from experience, from subjective reading of the details as they unfold. As in most professions, the general features must known well before decisions can be made on the inner details (the surgeon must know anatomy well before the start of any surgery).

The Market Unit (tm)
By Donald L. Jones, March 17, 2005
Copyright 2005

Discovering a Market Unit
Analysts typically use "price" in their work. In most cases this is a mistake. Price has a large volatility component. Value is a better choice. The early work of Steidlmayer identified the "Market Profile" as a way to find value for one day's trading. Market Profile value is found from cleared volume, with the center of value located at the highest volume. Meta-Profiles are built from half-hour range bars to find frequency of occurrence at each price. In the Meta-Profile, the center of value is at the price with the most frequent trading. Profiles decode the market feedback into value. In this study, Meta-Profiles are the source of all values used. The Meta-Profile for the DJIA future for April 1, 2004 in Figure 1 shows the day's half-hour bars on the left coalesced into the profile on the right. The profile displays the aggregated trading by price. As typical of all markets, there is little trading at the day's extreme top and bottom prices and quite a lot in the middle. Steidlmayer named the central seventy percent of trading the "value area". Value is the winner of the the price popularity contest.

Longer term value is found from the Overlay Demand Curve. The ODC is a linear aggregation of Meta-Profiles.

Figure 2A (not yet posted) is an ODC of the four days March 29 through April 1 (day symbols 6, 7, 8, 9). Trading is concentrated between 103800 and 102800; labeled Upper Limit and Lower Limit respectively. The single quasi-rectangular shaped distribution indicates the DJIA is balancing between upper and lower limits. Overlays are the source of the information that defines market units. In Figure 2A you see the balance that will ultimately move into a breakout, which with the ensuing trend, completes a market unit.

A five day Overlay, Figure 2B (not yet posted), shows the vestiges of an earlier balance that ended on March 26 (prices 102400 to 101700, day symbol 5). Lastly, Figure 2C (not yet posted), a nine day Overlay, displays an earlier balance between 101000 and 99900 (March 22 through 25, day symbols 1, 2, 3, 4). Call this balance 1. An upside breakout on March 25 (around 10:25 am) continued into March 26 (day symbols 4, 5, 6). Call this trend 1; it ended about 10:50 am March 26. That was the beginning of the new four day balance (although the fact that a new balance was developing would not be completely determined for a couple of days). You now have a mapping of a market unit that began with a balance (99900 to 101000) broke out into a trend (101100 to 102800) and ended with the beginning of the next balance.

The completed market unit 3/22 through 3/31 and the partial next unit is shown in the symbol/date table:


The beginning balance (symbols 1, 2, 3 and 4) covered the price range 101000 to 99900, denoted on the symbol/date table as Bal1. The trend phase, Tnd1, starting on March 24 continued into March 31 (symbols 4, 5 and 6). This completes the unit. In all it lasted six days and the balance to balance price change (amplitude) is 102700 - 101100 or 1600. Converted to dollars, the amplitude is $1,600, a significant price change. The new balance (Bal2, on day 6) signals the start of the next market unit.

Balances and the units associated with them have a somewhat fractalish nature. A longer timeframe, say twenty days, can include shorter units and at times the shorter ones can lose their identity through mixing. To completely define a market unit one needs Overlays with different time bases. Experience with futures shows a good set for market surveillance is 5, 10, 15 and 20 days. One can use a time base as large as desired, but the annual length used in much of equities analysis is sorely lacking in detail.

The Market Unit (tm)
By Donald L. Jones, March 17, 2005
Copyright 2005

The example below follows the behavior of the Dow Index future through the period March 22, 2004 through April 1, 2004, a period of nine trading days, culminating in Figure 2c (not pteosd yet). In this nine days the market created a four day balance (March 22 - 25), a three day directional move (March 25 - 29) and then a four day balance (March 29 - April 1). This unusually compact market unit was selected because of it's compactness. It displays the initial balance (March 22 - 25), how that balance evolved into a directional move, including a pause in the middle and then the later balance. An examination of the second balance would show it initially began as a pause (March 29 - 30), only evolving into a clear balance by April 1.

Figure 1. Short Timeframe Value from the Meta-Profile
Market value is described by price but it is not itself a price. For instance, think of a trading day, say April 1, 2004 for the Dow Jones Index. Split the day into half hour time periods from the open at 7:20 am to the close at 3:15 pm. Give each time block an identifier: y for 7:20 to 7:30, z for 7:30 to 8:00, A for 8:00 to 8:30, B for 8:30 to 9:00 and so on alphabetically for the rest of the day, where N identifies trading from 3:00 to 3:15 pm. These letters are called TPOs (time-price-opportunity, or that- price-occurred). TPOs show time - trade matches. As you will see, value is price-over-time and TPOs provide the measure.



Fig 1. Half-Hour Bars (left) and Meta-Profile (right), June 04 delivery, Trading on April 1, 2004. Price compression times 5.

The vertical bars on the left labeled z, y, A, B,... identify the trading range for each time period from 7:20 am to 3:15 pm. The vertical dashed lines accompanying the half-hour bars are a running measure of the developing value area.

Meta-Profile, letters on the right (TPOs), give price and time of day that price was traded (example: 103250 traded in the 8:30 to 9:00 am period (B) and also in C period, 9:00 to 9:30.

Features of Fig 1. (From the Meta-Profile)
1) Price 103950 traded in only one period, the high of the day
2) Prices 103900 to 103800 and 103250 to 103200 traded in only two periods
3) The most popular price, 103550 was visited in nine of the day's 17 periods
4) Seventy percent of the TPOs, the value area, lie between 103670 and 103320.
5) The shape of the TPO distribution is a single bell shaped curve.

Explanation of Figure 1. The Features
1) Little trading at the top four prices shows the market rejected these prices
2) Little trading at the bottom two prices shows the market rejected these prices
3) 103550 won the day's popularity contest
4) The bulk of the trading (70%) lies between 103670 and 103320 which is named the "Value Area".
5) The single distribution (bell shape) shows balance.

Conclusion: You found the price range the market selected on April 1 for its best estimate of value. Value is not a price, but rather the price range 103670 to 103320.

The Market Unit (tm)
By Donald L. Jones, March 17, 2005
Copyright 2005

Hi mzvega, I've been studying market profile for a couple of months now, focusing on the work of Jim Dalton (mind over markets,Markets in Profile and also his DVD series), and the theory completely changed the way I perceive the markets, honestly I can't look at it from another perspective now that I'm more or less familiarized with the idea of the market generated information from TPOs.

I'm in for a ride on your thread mate, best regards.

Thanx for posting! I understand exactly what you mean. I couldn’t possibly go back to technical analysis or the use of a bar chart. All TA works off the assumption that every price is fair value. Once you understand how auction markets and their participants operate, your whole perspective and thought process changes. Auction Market Analysis is definitely the road least traveled when it comes to market understanding………….

Overlay Demand Curves: Collective Value for Multiple Days, Figures 2A, 2B, 2C

The Meta-Profile value area locates market determined value for a single day. Longer timeframes are handled by the Overlay Demand Curve, a linear summing of the individual profiles. The Overlay determines 'market condition', visually identifying balances, trends and other more complicated states of the market. The thesis is similar to that applied to profiles: a single distribution indicates balance, a run shows a trend and distributions that are neither balance or trend are defined and 'other'. Market distributions are continually evolving, following the general system of balance to trend to balance. More correctly there are five steps: balance to transition to trend to transition to balance. Starting from balance the next step is a breakout into a transition. The transition may continue into a trend or move back into balance. A third possibility is to move into a choppy phase where neither balance or trend exist. This is one of the 'other' conditions where the market may zig and zag apparently at random.

In the Overlay discussion that follows we examine market condition over the eleven day time period March 22 to April 1, 2004 for the Dow Jones index, June Delivery. In the displays below, each day is represented by a symbol in the ROT PROFILE column, which stands for a date:


where ROT PROFILE identifies those dates each price traded. A price may trade in several periods of a day, e.g. 103750 traded only on day 9 (4/01) with that price occurring in three different half-hour time periods.

The Market Unit (tm)
By Donald L. Jones, March 17, 2005
Copyright 2005

A Four Day Balance
TPO VOLUME OVERLAY AND PRICE ROTATION PROFILE JUN 04 DJIA (CBOT) DAY 03 29 04 TO 04 01 04



The DYS and ROT PROFILE columns are two ways to estimate general trading density. TPO VOL OVERLAY is a pictorial of the trading density at price.

The four day Overlay of Figure 2A shows a single distribution (where the minimum distribution has at least three TPOs with four contiguous prices). The upper and lower limits of the distribution are 103850 and 102800. Outside those limits are vestiges of previous distributions or just noise.

Market perceived value for the four day period is no particular price, rather it is a 'value region' between 10385 and 102800. This longer term value may be contrasted with the 'value area' of April 1 of Figure 1: 103670 to 103220. Now you have a longer timeframe value with a local value nested inside.

Market condition is a function of the timeframe. If the market is in a long timeframe balance you might find not only, say a month balance, but intermediate periods (4 day, 7 day, 15 day, etc.) all in balance as well. We define this as an 'equilibrium' situation. A change in price level is often manifested by first, a shorter term movement (a 4 or 5 day breakout), then a 10 day breakout, and so forth. Likewise a trend coming to an end will be seen first as a short term balance, then longer balances, until the longest timeframe is balanced.


The Market Unit (tm)
By Donald L. Jones, March 17, 2005
Copyright 2005

Hi

does somebody know how to get more history after installing mt4 new? Need history for my statistics (history data used by the composite indicator).

greetings
happy new year

Thank you for your answer Mzvega.
Yes Iam looking for more history in the composite export data. I have already downloaded data from the history center, but the export data is still little.

The only way to have history is to save it. Every day it exports approx 60 days of data. If you save the data, once a month to a csv/excel/sql database and remove any duplicates, you will be able build a history over time.

Thank you for that tipp. In the future I will do this.

An Out of Balance Market Coming into Balance

TPO VOLUME OVERLAY AND PRICE ROTATION PROFILE JUN 04 DJIA (CBOT) DAY 03 26 04 TO 04 01 04


Figure 2B. Dow Jones Index, June 2004 delivery, March 26 to April 1. Price compressed times 10.
Figure 2B. illustrates a double distibution day. The later, upper distribution, is the one of Figure 2A. The lower distribution is obsolete, having been superceded. You would suspect that there was an earlier distribution that defined a lower value, but it is not possible to tell from a single day.


The Market Unit (tm)
By Donald L. Jones, March 17, 2005
Copyright 2005

Stepping from One Value to Another

TPO VOLUME OVERLAY AND PRICE ROTATION PROFILE JUN 04 DJIA (CBOT) DAY 03 22 04 TO 04 01 04



Figure 2C. Dow Jones Index, June 2004 delivery, March 22 to April 1. Price compressed times 10.
A longer view of the DJ index behavior through April 1 clearly shows a stepped equilibrium. The three days March 22 - 24 (symbols 1, 2, 3) and part of March 25 describes a nicely balanced market with a value region 101000 to 99900. On March 25 (symbol 4), around 10:25 am, price broke above 101000. The breakout initiated a trend that moved quickly up to 102000. The next two days, March 26 and 27 (symbols 5 and 6), the trend continued up to as high as 103250. In the middle of the trend, around 101800, upward movement stopped for as long as ten half hour periods. Such interruptions of a trend, called pauses, are a normal part of many trends. The Overlay display format makes pauses clearly evident. This trend, from breakout to trend end, 2250 points, is a 2.2 percent move, or $2,250 for the DJ future.

The ensuing four day period (symbols 6, 7, 8, 9) described the new balance value region 102800 to 103800. The previous balance at 99900 to 101000 is about 3000 points lower.

This example illustrates the clarity and definition of the balance regions as well as the intensity of the intervening trend. Four or five day balance breakouts are often the precursors, the early alerts for major market movements. However,large market movements are less frequent. Longer balances of ten or twenty days are more stable, of course. However, longer timeframe balances are harder to achieve. In the year 2002 (250 trading days) we found 139 five day balances, 169 ten day, 120 fifteen day and 116 twenty day balances. There were 77 days of true equilibrium where all four timeframes were balanced. The longest continuous run with all four balances maintained was only nine days.

The Market Unit (tm)
By Donald L. Jones, March 17, 2005
Copyright 2005

Variation Over Time
Most technical analysis methods assume regularity, but markets are anything but regular. For the Dow Index in the first quarter of 2004 the market created five units. The shortest was four days, a two day balance followed by a two day directional period. The longest was 20 days, fifteen in balance, five directional. The five units and their dates are listed below (B is balance, D is directional). Within the period of Jan 6 to Mar 16 encompassed by the March future, price started at 105070 and went from a high of 107500 to a low of 101150, closing at 10185 on Mar 16.

The variability of market units presented in this table is not unusual. For all of 2003 the average balance period was 7.4 days, with individual balance periods ranging from 2 to 15 days. In the same period the average directional period of 5.8 days came from periods ranging from 2 to thirteen days.

A trader finds opportunity in the directional markets. These begin with a movement out of balance and end with the start of a new balance. Predicting when a breakout will begin starts with an understanding of the balance itself, from the Overlay Demand Curve.

Locating the end of the directional phase of a market requires the identification of a phase change, the change of the directional phase into the congestion that is the beginning of a new balance. A moving, directional market does so under the impetus of demand. The best tool for reading demand change is the Market Profile, described by J. Peter Steidlmayer in 1985. Market Profile uses volume from the CBOT LDB data bank. The LDB depends on the clearing process and lags the market within the day. Most traders use the Meta_Profile, developed by Jones in 1987. Meta-Profile comes from a tick database and is real time.


The Market Unit (tm)
By Donald L. Jones, March 17, 2005
Copyright 2005

Hi Mzvega,

one of the most difficult tasks is to decide whether to wait for a second break or responsive trade after a "failed break" (capping in balanced condition). For example aud/nzd today. Sometimes the profiles do thier crawling and the real break follows shortly after. The responsive trade would turn into a loss in such a situation too - because the price does not go to the MID (sometimes only reaches 5day fairest price). So is it generally better to only trade responsive after a real breakout (trading the node/pausebreak)? What do you think?

greetings
C

Sometimes a "failed break" isn't a break out at all. It's testing for one of 2 things, testing for "new trend, or testing for "end of trend". A breakout that closes the day within the oct is called a "test" or "alert". (over several days of testing you can experience "value creep"). So a failed bo does not necessarily mean take a responsive trade. It also helps to look at the data. The data should give you a bias which option to chose.

Using your data ask, What was the market attempting to? How well did it succeed in the attempt? What's the flow direction? Have we been trending, and is this a possible test of "end of trend", or have we been bracketing and could this possibly be testing for "new trend"? Is vty building within the bracket or is it decreasing? TFF increasing or decreasing?
A quick look at the data tells me we have been in a LTF trend. That increases the odds it may be exhausting. Yesterday daily data was neutral & balanced. high activity, but directionless. If I had to bet money and form a bias, I would think the chances of a BO were slim. Only after a bo might I consider a responsive trade. But like I mentioned before I don't do responsive trading, so take my advice with a grain of salt.

But when you read the data about responsive trading it says "when price "enters" the oct and passes "through" the loct, might you consider a responsive trade. For price to "enter" the oct it has to first be outside the oct. Another way to attempt a resp trade is if price is passing up through the loct, and fails at the ul.
But use the data to form a bias, you're either trading (betting) a change in market condition will occur (bo to trend) or your trading (betting) that no change will occur in the condition of the market (bracketing)........

I don't do responsive trading......sometimes for me the best "trade" is to not trade at all

One Year of Market Units for DJ, Basis 5, 10 and 15 day Overlays

The time lengths of Market Units differ depending on the time scale examined. The table below is for the Dow Index for 2004. Length of a Market Unit is defined as the period encompassed from the beginning of one balance to the beginning of the next.

Figure 3. Market Units on three time scales for the DJ in 2004.
A market unit cannot be shorter than 2 days, one for the balance (5, 10 or 15 days) to be reported and one day for the directional move. The very short units of 2 or three days are usually failed breakouts. In the table column 1 is the number of days in the market unit. Column 2 is the number of events found in 2004 for 5 day Overlays extended out for the sum of days in each unit (7 events at 3 days is 21 total days for the 3 day unit). Similarly for the 10 and 15 day columns. At the bottom are the total market units for the year (51 for 5 day Overlays) and the average number of days per unit (7.4 for 5 day Overlays). The Figure M=> locates the median value.

While it is possible to find averages and medians for the market units, the spread is large. For 5 day Overlays, there is approximately the same probablity of occurrence for 3, 4, 5, 6, 7 and 8 days. This confirms the statement in the article "'Market Waves are NOT Cycles" concerning the use of moving averages in market analysis. For instance, the variation in market unit lengths from unit to unit, Feb. 23 to May 16 were 8, 11, 28, 7, 15, 16, and 7 days respectively. It would be hard to make sense of any sort of average for this time period. A long run of 15 or 28 days offers a great deal of opportunity for the day trader and swing trader both. For instance the 28 day run of March 16 through April 8 saw price go from 101620 to 104290 (about $2,500). The day trader would have maintained a generally 'long' mentality for this period while swing traders would look to stay on the long side.

The Market Unit (tm)
By Donald L. Jones, March 17, 2005
Copyright 2005

Very interesting view! Thank you. I realy enjoy our conversations, they force me to think about my view of the market. I reviewed my statistics.

1. I noticed that often the 20 day plays a major role in successful 5day breakouts. The 20day value expands at the start of a main trend, stops expanding at the later midpoint and shrinks at the end of a main trend. That tells me that the at the end the other timeframe trader/the public loses interest and professional capping starts to build up on the lower TFs. Not a good time to choose breakout strategy, because the main trend is at the end or at a main pause. It is better to wait for a potential break of the 20 day main trend profile.

The wohle problem of such a break is the direction. Sometimes the 1 day turns so fast, that one day it looks like the break would occur to the upsite, next day the 1 day tf turns and it looks like a possible downside break. Is it always better to wait for a test? What do you think?
I also stop responsive trading, it is too hard for me right now.

2. Would you trade a 5 day bracket breakdown (1 dist with "perfect" bell shape) against 20 day dist>1 (trending up)? The question I try to solve is how important the 20 day trending market is. Sometimes you have 20day trending and the 5 day bracket breaks in the opposite direction (the 20 day mid).

greetings
C

First let me start by making a simple suggestion, stop looking at the daily profile. This is not "Market Profile". There is a reason we don't trade daily profiles, 1 day of data is not a large enough sample to detect changes in the condition of the market. There is a reason we use a min. of 3 days worth of data for our analysis. Overlay "Demand" curve. We are measuring "demand". If 80% of the intraday trading volume is held by short TF participants, who end the day flat. 80% of the volume created by those traders carry no element of real demand. Demand is only created by traders who are willing to hold positions overnight and it's that "demand" that moves markets. So, 1 day's worth of data is not an accurate depiction of actual demand. You need several days. We use the daily data for our analysis, not for trading. We use a min. of 3 days of data to get a accurate picture of demand. It's always better to look at the 3day or 5day for guidance, not the daily profile.

The 20day often has quite a range. The 10day has greater importance to what the 5day is doing. In a few more posts of "the Market Unit", will get to the "element of time" for measuring units, (balance to trend to balance again= 1 unit). Which may give you some insight. I would only trade a breakdown of the 5, if the 10/20 is also in a bracket. If the current 10/20 is trending 1+ dists up I would not trade a breakdown of the 5, only in balanced conditions, if the break down is in the same direction as the trending 10/20, I would as it would be a continuation of the trend.
I'll use my usdcad trade for an example

Market Units for emini SP for 2005

Figure 4. 5 Day Overlay Balances for emini SP.
Each box represents a balance period as measured by the 5 day Overlay. The height of the rectangle is the average price range of the balance period and the width is the number of days the balance is maintained. The last balance may have a breakout sometime within the day.

Table 1. Balance Periods: emini SP 2005, 5 Day Balances
The 20 periods of balance are labeled PD. D1 and D2 are the starting and ending dates of a balance. #D is days in balance, including the breakout day if breakout occurs inside the trading period (regular market day). OP is the point of control of the first day of balance, CL is the point of control of the last. (Point of control is the central price of the day from the Meta-Profile or for CBOT cleared volume, the Market Profile.)

The rectangles on Figure 4 depict the variety of times and approximate amplitudes the balance periods can take. This is trader driven and hence is a picture of the vagaries of the collective trader. Although the SP market was generally rising through 2005, there is no apparent general strategy for the year. A trader with a 'long' attitude for the year (say on some fundamental view) would find a number of periods of adversity. Arguably the best strategy is to key off the balances, which are identified by the Overlay Demand Curve (Visual Graphic). You can know the balance and, at the start of any day, the price that will break out of the balance (an alert for start of a trend). This is a key signal, regardless of one's strategy.

The lack of pattern to the changing balance blocks evidences the lack of ability to project or predict the coming market behavior. Everyone would like to project the market successfully for even a few hours. Unfortunately, the tenets of Auction Market Value Theory precludes prediction. It is easy to see why. Think of a market that has just experienced a jump in price. Each trader responds in his own way, in his own time frame. This response also appears to all as a change in market behavior, collectively maybe up, maybe down or maybe no change. Each of us individually cannot know know what is going to happen because those who are effecting the change by trading are just making up their minds. Until they make up their minds, we cannot know which way it will go. That 'time for the market to make up its mind' is called the relaxation time, most typically in the order of 15 to 30 minutes. Steidlmayer thought this 'market relaxation time' was about 30 minutes and so chose that as the time frame for Market Profile (half-hour bars).

The Market Unit (tm)
By Donald L. Jones, March 17, 2005
Copyright 2005