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37 Years of Excellence in Auction Market Research

     

CISCO Futures
1-303-306-1521 1-800 800 7227 Fax 1-303-306-1572
http://www.cisco-futures.com
dljones@cisco-futures.com

Auction Market Value Analytics(tm) Report

Background

Copyright CISCO 2007

Contents/Data Tables

Data: EOD. Value Analytics Information for preparation for


tomorrow's trading strategy
        Table: Three days of reference points (Condition and market flow)
        2 Overlays: Two days and 3 days (location of proto-balances)
        3 Meta-Profiles: Last three days (details of market activity)
        Yesterday total tick counts for all futures (identifies tradeability)

Market Information for Current market (new day)


        Overlay + Current profile (current activity vs previous days)
        Value area of combined Overlay + Current profile
        CMaPS for Meta-profile value location, current reference points
        Run Pause 1: Congestion detection, 15 minute basis
        Run Pause 2: Congestion detection, 30 minute basis

Using Value Analytics Trading Data


        Step 1. Yesterday's Data. Develop your trading strategy prior to
Currrent open
                You can do this anytime after 6 PM, using:
                    Report Table (3-Day)
                    Report Profiles (Last 3 Days)
                    Report Overlays (2 Day and 3 Day)
        Step 2. Current Day: Use CMaPS to do the pre-open analysis as you
choose
        Step 3. Current Day: Use Todays AMVA Analysis to see the TPOs
added
                    to the 3 day Overlay
        Step 4. Current Day: Use CMaPS display to evaluate your trading
strategy
                    for exit/entry
        Step 5. Current day: Use Todays Run Pause to evaluate market
condition
                    for exit/entry
        Step 6. Anytime: Use Lookup Publications for profile information
sources

Auction Market Value Analytics (tm)

Successful trading is easy to define when based on value. The breakout


(initiative) trader enters on a change of value (a breakout when the market
has been balancing) and exits when value stops changing (trend end, start
of congestion). The trader of balances (responsive) seeks to close out when
value begins changing (trend begins). The key, obviously, is to track value.
Value, strictly defined, is constant only in balanced markets. (Imagine a
strongly trending market: value is constantly changing and hence is not
defined in a measurable way.) Value Analytics(tm) is the quantification
of profile and market condition variables, providing the data for
finding value The multi-day structure of Value Analytics is based on the
discovery that a single day's data is inadequate to define the development of
a balanced market condition. The minimum time is of the order of three
days.
Overlay Demand Curve Background
Value Analytics views the market from a three day perspective. examining
the flow of each profile variable over that time frame.

The first step for the serious trader is to understand value. In auction
markets, value is an experimental measure: it is what the majority of
traders think it is at that point in time. They vote by trading. Often
overlooked in profile literature is the fact that value can generally only be
found for a market in balance. Balance can be defined only in conjunction
with a time frame: a 3 day balance, a 9 day balance, etc. Further, a market
can be in a 10 day balance while trending in the 4 day time frame. Hence
the beginning of market analysis must be an understanding of the market's
condition (balance or imbalance). Value Analytics starts with a measure of
market condition on a 2, 3, 5 and 10 day basis.

The CBOT Market Profile (1985) manual opened the door to single day
value evaluation. Market Profile methodology is propounded more clearly in
the CBOT Market Profile Manual (1991) (see CBOT site or CISCO Sitemap for
free download link). Auction Market Value Analytics) (AMVA) assumes that
the user has at least a rudimentary knowledge of profile concepts and
methodology (i.e., form of a profile display (bell curve), point of control,
value area, initiative trading, responsive trading, etc.). AMVA integrates
longer term Overlay measures, profile methodology and general market
principles to find value and other trading reference points as a guide to the
development of one's trading strategy (set-up).

Value is continuous and migratory, as one of our bright students noted.


Price undergoes constant change (ticks); value change is much more
measured. Still, the local value (daily value area) fluctuates even in
bounded, balanced markets. If value changes slowly over a period of days
(migrates), the upper and lower limits of the balance are adjusted at the end
of each day's recalculation and balance is maintained. The balance
boundaries may change somewhat. This is value 'creep'. A creeping market
remains the province of the responsive trader.

A rapid change in value is evidenced by a price breakout from the


established balance limits, with price continuing directionally. In this case
the end of day recalculation does not find a balanced market (a trend is
underway). Initiative traders work this arena. Obviously, the market's
condition determines the appropriate method of attack.

Auction Market Value Analytics starts by identifying balanced market


conditions, as stated. AMVA uses timeframes of 1, 2, 3, 5 and 10 days for
the balance search. Balances, as they exist, give the information required for
entry and exit decisions. The initiative trader is constantly seeking the point
where price breaks out (for entry) and once in, immediately turns to looking
for signs of congestion (for exit). The responsive trader is active in
balanced conditions (selling highs and buying lows). When a (breakout)
trend begins, the responsive trader goes to the sidelines. Market condition is
thus the arbiter, the first level of analysis. Your knowledge of market
condition gives you a broad unbrella for your trading activities: the go, no
go signals of balance and imbalance.
As a trader (either responsive or initiative) continues with a trade, the
market is changing (continuous and migratory, remember?). Market
behavior reflects the collective intent of all participants; the problem lies in
divining their intent from the data flow (ticks for the most part) as quickly as
possible. Here techniques introduced by Market Profile*, Meta-Profile**,
standard market analysis and CISCO research come into play. This second
level consists of e.g.: starting with market condition and then comparing
price with earlier value (value area or the limits of a balance); volatility
change, initial balance behavior, profile value center and change, TPO
analyses, etc. Each of the 30 or so reference points in the Value Analytics
table have the potential for contributing information about the market's
intent. Each profile variable, by itself, rarely dominates. It is the collective
that counts. (This is the reason that traders who concentrate on value area
alone find a high variability in their trading results.)

Not all reference points are important in any one case. You must learn about
each of them and how to discriminate. This is called experience. In some
profile teaching the operative word is 'holism', looking into the pot with
some 30 or so elements and somehow divining which control the taste
today. Value Analytics goes the other way, separating the elements,
measuring them and their flow individually and eliminating those that do not
apply to the case at hand. Feedback is involved: if your understanding of a
particular item (say trade facilitation) is in error and you continually make
that error in your market strategy; your error will become apparent to you
rather quickly. This illustrates the value of isolating the reference points and
examining them individually.

The job of Auction Market Value Analytics is to integrate the two


information levels, market condition (Level 1) and individual
reference points (Level 2). This provides the trader the most current
information available on value and the way it is changing. Both level 1 and
level 2 informations are tabulated for the last three days, so that any
reference point may be traced and its trajectory determined. These end-of-
day data are available about six thirty PM, Chicago time. This gives you the
time to do a thorough pre-market analysis the night before (i.e. to develop a
trading strategy for the new day). You are also prepared for the after-
market, should you wish to trade it.

The trader has two jobs; First is to integrate the latest information (last
three days) into a strategy for the coming day. This primarily draws on the
Yesterday's Data on the Value Analytics pages. These data provide the
flow of the market, where it is headed. The result is a trading strategy for
tomorrow. Second is implementation of that strategy in trading tomorrow's
market (Current Day on the AMVA page).
Starting about 2 AM, when some of the electronic markets begin generating
substantial volume, the Current Day market Value Analytics program offers
a current analysis of the market, including it's interaction with the
yesterday data list. These data offer an answer to the trader's toughest
question, "what is my market doing now (i.e. continuation or not)". An
additional tool, 'Run-Pause' analysis, examines congestion on the fly, on 15
and 30 minute scales. From midnight forward the trader can be in touch with
the market, including all the information required for trading decisions within
his (or her) trading strategy.
* Market Profile is a trademark of the CBOT.
** Meta-Profile is a trademark of CISCO. Meta-Profile methodology is
copyrighted.

Information for Trading Analysis: Specifics/Benefits of the Value


Analytics data package:
Last three days of auction market reference points:
    1) This is enough history to find market direction and includes:
        a) Four Overlays for finding market condition (2, 3, 5, 10 days)
        b) Reference points for each day (value area, volume, volatility, etc.)
        c) The Meta-Profiles for each of the three days
        d) The 3 day Overlay and the 2 day Overlay graphics
        e) 6 PM to midnight analysis via standard profile (CMaPS)
    2) 3 day package minimizes rollover problems (2 days off at rollover,
        once every three months)
    3) Cost effective: additional data bases not required
    4) Self training aid: Profile tutorial access via Lookup Tables for
        Profile literature
    5) Current day market tracking with the Value Analytics Current Day
Programs
        a) Current profile, value, etc., starting anytime after midnight
        b) Display of 3 day Overlay + Current day TPOs
        c) Run-Pause measure (2) for intra-day congestion
Value Analytics is the culmination of the Market Profile revolution
begun by J.Peter Steidlmayer and the Chicago Board of Trade in
1985. Their focus on day value and the dynamics of profile formation had
the stated goal of "giving the trader an edge". In the statistical universe of
an auction market, even a modest edge can lead to substantial profits in the
long run (look at what an 'edge' has done for the statistics based casino
business).

As portrayed in the 1985 CBOT Market Profile Manual, Market Profile


describes a market that traces out a bell shaped (normal distribution) curve:
little trading at the higher and lower prices, with a lot of activity at the
middle prices. Value is found as the central 70 percent of the cleared trading
volume. Reference points such as day types, range extension and tails are
defined. These analyses are based on the CBOT Liquidity Data Bank of
cleared price, time and volume. This data bank is unique to the CBOT and
the CBOT advertised a product, "The CBOT Market Profile Service is a
Detailed Breakdown of Pit Activity on the Exchange Floor. Volume and Price
Information...Measured Against Time." Market Profile parameters discussed
below were all defined in terms of the CBOT Liquidity Data Bank (LDB) data.
Data from the LDB volumes is used to find 'market condition', where 'trend'
refers to intra-day behavior.
Liquidity Data/BuySell Background
Market Condition in Value Analytics is based on multi-day (at least 3 days)
behavior of the market; resulting in a market that is either in balance (with
a well defined upper and lower limit) or one with changing value (a
directional market). See e.g.
Overlay Demand Curve Background.

Within the LDB framework, the myriads of daily market profile shapes are
parsed out and meaning is inferred from their shapes and (cleared) volume.
The process is primarily pattern recognition, as is abundantly clear from the
many examples in the Manual and the various other Steidlmayer
publications. And, of course, it is an end of day process (clearing was
completed around 9 PM).

A practical problem for most traders was the limitation of profile concepts to
CBOT futures. e.g. Value area is defined in terms of (cleared) volume and
the CBOT LDB is the sole source. Indeed, all the profile concepts required
the LDB. Not everyone wanted to trade just CBOT futures and CISCO as an
information provider to traders quickly saw the need to be able to determine
value for non-CBOT markets. This resulted in the development of the Tick-
TPO or Meta-Profile from tick data and CISCO published on the concept in
1987 (twice).
Introduction to Day trading
Meta-Profile generalized the 'Market Profile' type analyses to all auction
markets, with ticks taking the place of cleared volume. The CISCO Overlay
Demand Curve (tm) for locating market condition (balance, imbalance)
made the leap from day value to longer time-period value.

A follow-on book to the 1985 CBOT Market Profile Manual, by Dalton, Jones
and Dalton (Mind Over Markets, 'MOM, 1990'), more clearly organizes the
profile field. Although their analyses were mostly on CBOT futures, they did
follow the CISCO lead and applied profile analyses to several non-CBOT
futures. (MOM, Appendix 1, explains the 'TPO Value-Area Calculation',
without attribution to the source, CISCO.) 'MOM', too, is heavy on pattern
recognition. And the same is true to an extreme in the new book by the
same authors (Markets in Profile, 2007) .

Enter Auction Market Value Analytics (AMVA):


There is much worthwhile in the market insights of the Market Profile
publications. The difficulty lies in the required pattern recognition
methodology (holism) needed for their application to real world market
analysis. Value Analytics is designed to combine the older Market Profile
discoveries with the newer Meta-Profile and Market Condition methodology
into an analytical technique that results in objective market measurements.

Where pattern recognition provides inferences, Value Analytics offers more


solid guideposts. For instance, early termination of an auction (no tail at,
say, the low) may tell pattern recognitionists that buyers took over, with the
resulting group of potential consequences (e.g. the start of a trend). By
comparison, data from Value Analytics fills in the blanks:
        1) Is the market in balance?, If yes the Overlay Demand Curves
provide
            upper and lower limits
            and the tail may have little meaning until and unless there is an
upside breakout.
        2) Is the market growing (increasing range and volume) or slowing?
The AMVA trader
            can tell by following:
            the track of TPO counts, tick counts, the trade facilitation factor, etc.

        3) Is a tail incomplete? AMVA gives you quantitative measures of


            subsequent behavior.
        4) Is the market starting to become directional?, i.e. is price nearing a
balance limit?
            The Overlay for various timeframes provides an answer.
        5) And a 'MOM' favorite, what is the attempted direction? AMVA
calculates it.

Now let's examine some analytical results for emini SP 20070110 (data at
the link):
Value Analytics Sample Data.
For the day and future posted there, the market is in balance for time
frames of 2, 3, 5 and 10 days. Volume is falling, value area is stable, TPO
counts are falling (slightly), the lower tail is incomplete (buyers took over at
the low), the market showed little directionality (Attempted Direction (2 of
them) is both up and down) and TPO balances above and below the Point of
Control are even. This is a classically balanced market, waiting for something
to start driving it.

In the holistic universe of profile pattern recognition a trader must have a


very large amount of 'inferential' information, putting together a number of
clues into a final diagnosis. If the market does not behave as expected, what
part of the whole can be examined to explain the failure? On the other hand,
AMVA analysis is built from discrete elements as in the sample data. These
elements are put together only at the end of the study. If the analysis
proves wrong it is easy to sort out and examine the offending element(s). In
fact, as markets change, as some do over time, AMVA data reflects these
changes and the trader can make adjustments.

The difference between the two disciplines (pattern recognition and AMVA) is
most easy to understand by what is meant by trader self-understanding.
Self understanding to the pattern recognitionist includes all the elements of
the various patterns, how they interact and the trader's involvement in the
process. Self understanding to the AMVA trader is simply a knowledge of the
level of risk that trader is comfortable with.

What is Auction Market Value Analytics (AMVA)?


We have made some comparisons between pattern recognition and Value
Analytics. In a larger sense AMVA represents market concepts first beginning
as ideas and qualitative evaluations being transformed into more
measurable, quantitative numbers. The move is from practical observational
methodology developed through the genius of Steidlmayer for his own
benefit as a trader, to the more analytical format of AMVA that can be
applied by any educated trader. AMVA is not a formula, but it distills much of
the pattern recognition information into useable numbers for a trader's
strategy.

AMVA is the confluence of the early work on profiles by Steidlmayer with the
subsequent analytical studies of CISCO. The insights of Steidlmayer broke
new ground in the understanding of auction markets. His contribution cannot
be diminished. Without his perceptive understanding of the markets from the
perspective of being in the pits, there would possibly be no valid auction
market analyses today. His intuitive approach developed truths that we
believe are better applied by objective analyses to the (non-pit) markets of
today. The bell shaped curve concept was critical to the early description of
the market. Today we know that a true bell shaped market curve is a rarity.
But the concept gave market profile it's original legs (value area). The field
began rounding out with the discovery by CISCO that TPOs are valid
replacements for the cleared volume of the original profile, for calculating
value. That meant that all auction markets, not just the CBOT, could be
analyzed. As noted above, CISCO's development of the Overlay Demand
Curve identifies a market's condition (balance). Putting it all together has
produced a trading tool, AMVA. The AMVA trader can use objective measures
to replace much of the intuitive, holistic market profile teaching of today.
One thing has not changed. AMVA methodology, like the original CBOT
Market Profile, gives the trader an edge, not a certainty.

The first goal of Value Analytics is to put the trader in postion to make a
thorough analysis of a market prior to open, to offer corrobrating (or not)
pre-opening market behavior and finally, to track and understand a market
as it trades throughout the day. The ultimate goal, of course, is to put the
trader in position to generate more winning trades and to avoid more losers.

Heretofore, Market Profile has been the only candidate for market
understanding, primarily, for most, via the value area. Value area remains
important if used properly, but it is only one of the numerous elements
needed to analyze a market. Typical questions answered objectively by
Value Analytics are:
        Is the market in balance? Always the primary question.
        Is volume increasing, decreasing?
        Is the price range increasing, decreasing?
        How well is the market facilitating trade?
        Is the Initial Balance widening, narrowing?
        Is the point of control rising, falling?
        Is the value area increasing, decreasing?
        Are the tails showing completed auctions?
        Are the range extensions consistent?
        What is the market 'attempting' to do?

4. Limitations on Analysis
Any measurement depends on the quality of the data. Statisticians are
concerned with sample size, knowing that a too small or poorly chosen
sample will give unreliable results. In our analysis of market data, say ticks,
we are sampling a market. Value for a day, for instance, is the central 70
percent of the TPOs. How many TPOs are needed? How many TPOs will
make the cluster (quasi-bell) a reliable sample? TPOs come from ticks and
as a starting point we count ticks. Restated, how many ticks are required for
an adequate sample?

A simple rule of thumb minimum is 200 ticks per day. In a four hour market
this is about a tick per minute. A 200 ticks per day market will have
extended periods of inactivity. A more reasonable cutoff is in the
neighborhood of 500 ticks per day (about 2 ticks per minute average).
Typically, there are about 60 deliveries with 500 or more ticks per day.
Extending down to 200 ticks brings in another 20 deliveries. Tradeables of
80 deliveries contrasts with the some 250 contracts we cover. The
Value_Analytics application has a listing of tick counts for each future we
carry (Tick Count under Yesterday's Data. The color codes are green
(heavy trading, above 500 ticks per day), yelllow (adequate activity, 500 to
200) and red (below 200). Here tick meanS 'change in price', the actual
definition of ticks, not the transaction count (time and sales) so often
carelessly called ticks. Two hundred ticks in a six hour market is about one
tick every two minutes. There are likely to be some fairly long periods with
no trading at all; so that market is not facilitating trade very well--you might
get some ugly fills on a market order.

It is easy to be fooled by a bar chart of a thin market. For example, the


grains often will trade heavily in July and December (old crop, new crop) the
October (e.g. soybean oil) may have little activity. However, the the high -
low price range will approximate the heavier traded deliveries. Why?
Arbitrage. The exchange posts the opening and closing prices to keep all
deliveries in line. Even if there were no trades, a bar chart would show a
range for the day. For there to be a valid auction for you to trade, you must
have volume, someone to take the other side.

Value Analytics tools/data: see: Value Analytics Sample Data.


A) Post close of today: Value-Analytics Report

1. Market Condition Location of Value


       10 Day Overlay
       5 Day Overlay
       3 Day Overlay
       2 Day Overlay

2. Meta-Profile: Value, Reference Points (3 consecutive days)


       General
               Price range
               Number price ticks
               TPO count
               Tick count
               Trade Facilitation Factor
               Volatility
               Close as percent of high
       Initial Balance
               Price range
                Number price ticks
                TPO count
                TPOs above/below
        Value Area behavior
                Price range
                Price location
                Point of Control
                Point of Control hald-hour symbols
                TPOs above/below
                Number price ticks
        Tails
                Location upper
                Number price ticks upper
                Completion or not upper
                Location lower
                Number price ticks lower
                Completion or not lower
        Range Extension
                Price range upper
                Price range lower
        Attempted direction
                Basis POC
                Basis Rotation Factor
        Multiple Distribution Days
                Number distributions
                For Each Distribution
                Value area
                POC
                POC TPOs

3. Meta-Profiles: (3 consecutive days)

4. Overlay Demand Curves: 2 day and 3 day Overlays

There are some 30 entries in the Value-Analytics Table. That may seem a lot
and it is. But the market is complex and that is shown in a number of ways.
At any time some of the 30 may apply, some may not. A problem with
standard Market Profile analysis is that you, the trader, are expected to
recognize (holistically) the current pattern the market is describing (day
type). Then you are supposed to integrate the changes that are constantly
occurring. This can be a tall order. At end of day, of course, there are no
dynamic changes. But there will be as you trade on this information
tomorrow.
In preparing for tomorrow with the value Analytics Report, the average
trader can divine a market's behavior in minutes. With that information
under one's belt, setting up a trading strategy is much, much simplified. It
therefore becomes possible to analyze several markets for the next day's
trading. Diversified trading can be a reality, with all the benefits that come
with the risk reduction.

B) Tomorrow pre-open: for markets with overnight (electronic)


trading
Currently, some markets begin actively trading after midnight. Within an
hour or two a comparison of current market behavior with the 3 day Overlay
gives a graphic picture of the market's follow-through of the previous day's
movement. Adjustment of one's trading strategy generated last night may
be needed. If so, it will be clear what has changed from the previous day.

C) Post open:
The same tool used for the pre-open, profile plus Overlay may be utilized
throughout the day.
In addition, you may use:
        a. CMaPS for Current day trading
        b. Run-Pause analysis to measure balance on the 15 minute time scale
        c. Run-Pause analysis to measure balance on the 30 minute time scale

D) Look-up Tables:
Any value trader has had occasion to wonder just how profile analysis
applies to a particular situation. Finding answers has been difficult because
of the breadth of the coverage (yes, there is a lot to it) and the fact that
some of the expository materials (e.g. CBOT Market Profile Manual) have no
index. As a part of this product we offer a set of Look-up Tables. We have
combed through the primary references, listing index items or elements we
feel can be helpful in finding answers to questions of meaning or definition.
Some of the earlier materials are free, some are still in print and some are
out of print.

The list:
C4 [203MMM.ASYMMETRY] Value_ANALYTICS_DIRECTORY.TXT
Primary References for Value_ANALYTICS

        R1. Book: CBOT Market Profile 1985


                Brief review: Market Profile (MP), Liquidity Data

        R1A CBOT Market Profile 1985


                Index/Keywords
        R2. Book: Markets and Market Logic, Steidlmayer & Koy 1986
                Principles, Components, Market Generated Information

        R3. Book: Mind Over Markets, Dalton, Jones, Dalton 1990


                Application of R1 and R2, Directional Performance Relationships

        R4. Book: CBOT Market Profile 1991


                Brief review: Market Profile (MP), Liquidity Data
                Free download on CBOT site

CBOT Market Profile Manual

        R4A. CBOT Market Profile 1991


                Index/Keywords

        R5. Book: Value Based Power Trading, Jones 1993


                Overlay Demand Curve, TPO Value Measure, Trader Control
Package
                See especially Ch. 4

Value Based Power Trading

        R6. Book: Markets in Profile, Dalton, Dalton, Jones 2007


                Review of MP, Timeframes, Long Term to Day Trading

Book: Markets in Profile

        R7. Reports: Research in Value, Auction Theory, Trading Tools, Articles

                www.cisco-futures.com

        R8. Reports: Profile Report, Dalton Capital Management/CISCO (1987 -


1991)
                Profile Research & Analysis

        R9. Reports: Market Profile Society Intl. (1992 - 1994)


                Professional Journal

Market Profile Society International with Links

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