Auction Market Value Theory & Analytics

@ dljonesFan
identical...........

It looks like standard settings...

I dont use the standard settings, I have always used the color maroon for Friday, and orange for Sunday.
Same settings for both charts, still Identical...................

Ok then I have to adjust my settings every day.

Load the indicator on the chart, set to your preferred settings, then save the chart as a template.
Then it doesnt matter what chart you open. Just load the template on to the chart.
Then load the "Delete All Objects" script. It will remove all the objects on the chart. Then open the indicator settings and close it, to reset the indicator. It will load the chart with your preferred settings.
I have to do this myself, or else I too would have to reset the standard settings every time I open a chart to see my preferred chart settings.

Thank you Mzvega.

How do you handle the market context ("the big picture") in your trading decisions?

Iam currently using bar charts for speed reading the weekly and monthly price behaviour and monthly/weekly meta profiles for the more important market generated information. They give me a bigger picture about trading location, evaluating risks and opportunities. This technique was introduced by J.Dalton and R.Mesch.

greetings
C

The Market “Condition” of my preferred TF of choice is the “context” I use for my trading decisions.
The “condition” of the market is the “context”………..

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').

continued........
Donald L. Jones
Copyright CISCO Futures 2007

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

continued........
Donald L. Jones
Copyright CISCO Futures 2007

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.


continued........
Donald L. Jones
Copyright CISCO Futures 2007

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

continued........
Donald L. Jones
Copyright CISCO Futures 2007

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

Donald L. Jones
Copyright CISCO Futures 2007

I just want to point out again "Market Profile" is not the same thing as "Auction Market Value Theory". Nor can one be used to interchangeably mean the other. The only thing they have in common is that they both use the similar "price*time format" used to display data. That is where the similarities end.

"Market Profile" is copyrighted to CBOT & CME. Because the contractual volume data used in "Market Profile Analysis" is exclusive to the futures market (cbot & cme)


"Auction Market Value Theory" is copyrighted to Donald L. Jones
"Intra-day trading with the tick based profiles" (tpos), & other concepts are also copyrighted to Donald L. Jones

After doing Empirical Research & Empirical Studies, Jones proved that CME volume data is not needed for "Auction Market Analysis".
"Auction Market Value Theory" & "Intra-day trading with the tick based profiles" is the methodology used for markets that do not report volume (Forex). It does not "proxy" or "substitute" contractual volume with tick volume

"Auction Market Value Theory" & "Market Profile", both cannot be used interchangeably to mean or be the same thing, if the methodologies where the same, one would be in copyright infringement on the other & vice versa. Two separate methodologies, two separate copyrights..

Mesch & Dalton use "market Profile" concepts; they exclusively trade markets that report contractual volume.
I trade a market that reports no contractual volume. Therefore I use "Auction Market Value Theory" & "Intra-day trading with the tick based profiles" , concepts & methodology.

I use the data & methodologies applicable to the markets I trade (Forex).
Its important not to confuse the methodologies by thinking that one method's concepts are applicable to the other.

What are the good options for profile charting on mt4 out there?

Strategies, Models and Auction Market Trading........

A trading model is a plan of action for the trader. It may be explicit as in a moving average crossover breakout or as intuitive as pattern recognition. An auction market model is the result of a three step strategy development process. These are Market Strategy, Trader Strategy and a synthesis of the two, the Working Strategy.

Market Strategy is determined by the market itself, by the characterisics that define it. It may be a short timeframe market with a lot of action packed into minutes or even seconds, like the indexes. Or, it may be a longer timeframe, more sedate market like the grains. An auction market study of a market reveals that market's behavior, its condition, and hence the strategy one must employ trading it.

Secondly, the trader has characteristics and preferences; timeframe, risk, markets to trade, account size and so forth. These go to make Trader Strategy. Traders control their Trader Strategy, but Market Strategy is what the market offers. Working Strategy is a synthesis of Market Strategy and Trader Strategy. One's plan, or model comes from the Working Strategy.

Market Strategy
Traders want to catch a trend and ride it to congestion. This happens only under the right conditions. The market must cooperate, offering opportunity. The trader must understand the market well enough to know when it is in or approaching a cooperative mode. A market's condition describes for you it's "reference points". These are the measuring sticks, each telling something about a particular market feature. Reference points show the phase of the market (balance, trend or transitional), its current risk, its historic risk, its value, the volatility (and how it is changing), volume (and how it is changing), the behavior of the commercial traders and a number of others. More advanced analysis in the Advice Engine examines the trading potential of the current market in "absolute terms". Reference points are like the pieces of a jig-saw puzzle. Combining the parts describes the market. Putting the parts together makes the Market Strategy.

A typical Market Strategy for a market in balance would specify entry points, risk, internal trends, current value and its center, commercial traders behavior, trading range compared to the norm, shape of the price-time bell curve, recent behavior of the market and any trends in volume and volatility. Market Strategy provides a market-based plan of trade entry, i.e. where the market offers opportunity.

Examining the same market after it has begun to trend alters the focus. Many of the same reference points are still important (commercials, volume, volatility, value and the like). But now congestion governs. Has the trading range become limited? Is the price-time curve bunching?. Have the commercials capped the trend? Is volatility dropping? Is volume easing? Market Strategy is now the search for clues for a transition to congestion.

Trader Strategy
Trader Strategy is based on the trader's situation and requirements. It may overrule market strategy. For instance, a market may still be showing trend, but if the trader meets a target, an exit will be taken anyway. Or a timeframe may be set (exit no later than 15 minutes before the close). Or a risk limit may be different from that found in the Market Strategy. Trader Strategy adds the imprint of the trader to the overall trading methodology.

Working Strategy
Working Strategy is a combination of Market Strategy and Trader Strategy. Market Strategy undergoes large changes on a daily basis. Trader Strategy is less variable. One picks markets to trade, risks to take, hours to work, etc. That strategy changes when a trader changes (e.g. trade DJ indexes instead of SP's) or broadens the base of trading from one future to several. A Working Strategy is unique to the trader. No one else will have the personal input even if they start with the identical Market Strategy.

Trading Plan/Model
Models arise from the Working Strategy. They are intimately related to the trader. A model is a codification of procedures the trader has found that work. It includes the elements of market analysis in the Market Strategy, the preferences and idiosyncrasies of the trader and the knowledge gained by the trader from actual trading. As in any successful business, a successful trader develops a 'feel'. This is not magic. It is experience. Much of it comes from making mistakes and learning from them. Another part is from observing markets in many conditions and seeing what follows. While intangible, 'feel' is a very real part of developing and trading a model.

The path from Market Strategy to Trader Strategy to Working Strategy and finally to a trading plan/model is the "trading equation". Mathematically it is

Market Strategy + Trader Strategy = Working Strategy ==> Trading Plan/Model.

The trading equation is a strong argument against purchasing a commercially available trading model. Such a model cannot fulfill the trading equation, since it cannot include the trader's strategy. A trader is forced to have a trader strategy because it fits his/her particular situation. Commentators on technical analysis regularly point out that people who purchase models do not follow them. The purchased model is only a part of the equation.


Strategies, Models and Auction Market Trading
Donald L. Jones May 11, con't.........

Hello, Mzvega

Having read the article above, I have found some points to discuss.

Author is saying about holism and objectivity.
I have been thinking of what he seems to be trying to say - "holism VS objectivity". Does not he?

1/ He is saying @Defining 'Day Type' illustrates the "holism" problem@.

So what? Why should it be not good for market understanding?

2/ Then he is saying @That is one of the problems with pattern recognition@.

Personally I can say that there is no need to try identifying all the day types. One just needs to find out whether the day is balanced or not.

3/ At last, where can I find "Three day..." paper?

Best
D.P.

P.S. Futures Trading Based on Market Profile Day Timeframe Structures

https://web.archive.org/web/20150630..._day_rule.html

Thanks.

D.P.

This is a nice introduction to Market Profile. I am largely an Options trader, occasionally hedging delta in the cash market. The profile is great for giving me that so need perception of Value. Also volatility is highest as we go through Value, so getting those at the money options is bread and butter stuff especially when you are looking to increase vega.

I have seen a lot on Vanilla Options Trading. My good friend has a blog, he is an even bigger Options trader. His blog site is here, some useful information on Options I think, he has had it for a few years.

Is anyone a big Options trader (Not binary)?

Thanks for your friend's blog link.

Best
D.P.

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.

If The primary writers in the area do not agree with each other or even themselves on the number of basic day types that exist, What does that say about Market Understanding or Pattern recognition for that matter? Beauty is in the eye of the beholder

That is one of the problems with pattern recognition (holism). 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? Having No foundation or consistencecy to base your trading decisions on How could that be good for Market Understanding?

It also illustrates why this is not a market profile thread and the reason "day types" are not used.

In MP balance is also a "subjective" measure. What looks like balance to one person, may not look the same to another. That's the problem.

The whole point of the article was to highlight the differences between two different methodologies

Title of the article was
"Dialogue on the Two Systems: Holism and Objectivism
Market Profile versus Value Based Analysis"

Market Profile (holism/pattern recognition) versus Value Based Analysis (Objectivism /analytical, measurement based)

Auction Market Value Analytics (AMVA) is an analytical, measurements based approach, Market Profile uses (holism/pattern recognition)
MP looks for balance in the intrady TF, AMVA follows the 3 day rule......etc

In MP balance is also a "subjective" measure. What "looks" like balance to one person, may not look the same to another. Just as subjective as "day type"

Auction Market Value Analytics (AMVA) is an analytical, measurements based approach, A "balanced distribution", is a single distribution that lies between 3 or 5 tpos that contains the close, depending on tf. A Simple "quantifiable measure". An "Objective" fact. It doesn't matter who looks at it, it is either balanced or not. No holistic interpretation.

AMVA
"The key is that valid value can only be found when the market is in a balanced (congesting) state. Consequently, a precondition for valid value determination is balance; so then we must define what balance means in market "measurable" terms. Single day pattern recognition will not help; a quasi-bell shaped profile can and does often occur as a one-day pause in a strong trend.

To get a "quantifiable" measure, rather than an "eyeball test", we break the data into the smallest measureable units (TPOs). A balanced distribution, is a single distribution that contains the close, that lies between 3 or 5 tpos depending on tf. A Simple "quantifiable measure", not biased by the observer. An "Objective" fact. The market is balanced or not. There is no room for "subjective" interpretation.

This thread is not about Market Profile.
The use of "subjective" data and "pattern recognition" is not a "permitted practice" in Auction Market Value Analytics. The "Data" has to support profile.
The long & short of the matter is this thread is not about "Market Profile" nor do any of it's intraday concepts apply............
"Value Based Power Trading" found in the first post and CISCO research & articles are the subject reference materials used in this thread.

Strategies, Models and Auction Market Trading
cont'd.........

In the Beginning...
Beginners in most professional fields start with a course of instruction. Following the instruction/introduction phase, there is an apprenticeship. A successful apprenticeship leads to "journeyman" status, where the individual becomes a member of the professional community, making a living from his/her efforts. Some few rise higher, becoming masters; teachers, innovators, gurus.

The standards developed by most professions do not exist for traders. There are no auction market schools. There are no organized apprenticeship programs for auction market traders. The beginner, convinced of the potential benefits of trading, is on his own. He/she reads magazines, books and gets ideas from the internet and other traders. Inevitably the search for understanding leads to a "perceived" need for a "model". There are many models in books, magazines and explained in weekend seminars. Such models address the 'Market Strategy' part of the trading equation and at best provide only a partial answer. Most (all?) of the 'sure fire' models do not work. Unfortunately, the beginner does not realize that "a model that works" is worth it's weight in gold and no one would sell such a valuable commodity.

Technical Analysis: A Bum Steer
The path of least resistance for the beginner is technical analysis. It is offered and discussed widely. Methods for calculating market 'indicators' are prevalent. At best, technical analysis deals only with first part of the 'trading equation', i.e., with the Market Strategy, leading to a "model". Widely used, to little apparent avail, technical analysis plays a prominent role for many in getting started in trading. Learning to calculate a moving average or oscillator is hardly the answer when one does not understand the market.

What Path to Take?
Lacking formal educational facilities, the career path for traders, is not well defined. It is certainly clear that one must understand markets well enough to divine the Market Strategy for that market at that point in time. It is equally clear that one must define one's own strategy, which operates within what the market offers. Only then can a reasonable trading plan be developed. How can one find the market's strategy? And then one's own strategy? And then a plan. One set of steps follow.

Learning to Trade
The Steps:
1) Learn market structure. Learn the foundation principles of markets.

2) Learn to 'read' markets; which ones offer opportunity and at what risk. Application of market principles leads to Market Strategy.

3) Define one's strategy: time frame?, activity level?, maximum risk? reward? This knowledge provides Trader Strategy.

4) Synthesize Market Strategy and Trader Strategy into a Working Strategy. The Working Strategy is the trader's plan of attack.

5) Find the market details, the current 'reference points'. Integrating the current reference points into one's Working Strategy becomes one's trading plan. The strategy now has numbers, a guide to action.

Step 1. Market Principles: Auction Market Theory
Auction market principles are found in Auction Market Theory. An abbreviated version of the theory is published in Stocks & Commodities, June/July 2002. A more complete version is on the CISCO website, under "Whats New". Theory provides the framework for analysis--those principles to follow. Theory shows the trader what to look for in a market. Once the market is defined, theory positions one to find a market based strategy. Theory guides the trader in dissecting the market. As a result, a trader gains an understanding of opportunity offered by the market and the risk inherent in that market at that point (say the end of a market day). These variables change with time, often within 24 hours or less.

Step 2. Market Strategy: Applying Auction Market Principles
Market Strategy comes from a market's current condition. For example, if a market is in balance, the upper and lower breakout prices are known. The balance range is known. Price exceeding the upper or lower limit is a 'breakout', an alert for the beginning of a trend. Also known are the balance 'value area' and 'point of control'. Breakouts from balance give an'opportunity' measure which permits a cataloging of that market's potential for trading. The balance range can be translated into a risk measure. Trading points are developed from limits and value areas. Overall trading potential comes from the opportunity /risk ratio (reward-to-risk ratio). Markets can be compared by their reward-to -risk ratios. Those with a currently too low reward-to-risk ratio would not be traded.

If the market condition is not balanced, less is specified by the market parameters. It is generally more risky to trade. If a clear trend is in place the day trader knows to go with the trend. The long term trader who did not get in near the breakout has missed the lower risk trade. Playing 'catch up' is a much higher risk strategy.

Regardless of outlook, the auction market trader has information that illuminates the market, aiding in action decisions. Still, the trader must keep in mind that there are only two goals: get into a trend early, exit when the trend begins congesting.

The market will tell you it's condition, volume path, volatility path, commercial behavior, congestion, member's intentions, tradeability, etc.

Market information sets a strategy unique to this market at this time:
A balanced market will breakout at some point in time.
A trending market will always come into congestion. ("come into congestion" is not used "interchangeably" to mean the same thing as "reversion to the "mean")
The market may be distributing (moving) or congesting--Auction market analysis tells which.
Members intentions (commercial capping) are on the Visual Graphic.
Tradeability overall comes from Advice Engine studies.
Ditto for reward to risk ratios.

Step 3. Trader Strategy: Investment, Risk Aversion, Timeframe
Trader Strategy reflects the needs of the trader. It must fit within the guidelines set by the Market Strategy. If the market is in balance, one path is followed, if not, another. If the overall reward-to-risk ratio is poor, the market is rejected. Exactly how trades are made depends on the trader's outlook--day trader, long time-frame trader or anything in between. Included are the trader's risk preferences, market preferences, times to trade and any other variable unique to the individual.

Some Restrictions on Trader Strategy
Size of account limits futures traded and time held.
Number of contracts in the entry trade are limited.
Extreme volatility equates to large risk: do you want this?
Holding overnight carries longer term risk: do you want this?
Active day trading requires constant attention: do you want this?
Information on Market Strategy is factored in.

Step 4. The Working Strategy
With Market Strategy and Trader Strategy determined, a Working Strategy comes from synthesizing the two. Worked out are risk parameters and limits, state of the market, timing of trades, exit strategy, etc.This is your contingency plan for a varied set of possibilities.

Step 5. Trading Your Plan: Reference Points
A trader builds trading decisions within the conditions set by the market and his/her Trader Strategy. It is a 'model' in the sense that the trader has a plan of action, but not the sort of exact model a beginner has in mind.

The trader takes what the market offers (Market Strategy) and works within that framework. The basic trading plan is simplicity personified: "get on a trend early and exit when it is over". Execution of the basic plan, using the information in the Working Strategy, is the trading model.

Strategies, Models and Auction Market Trading
Donald L. Jones May 11, 2002