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37 Years of Excellence in Auction Market Researc1
37 Years of Excellence in Auction Market Researc1
CISCO Futures
1-303-306-1521 1-800 800 7227 Fax 1-303-306-1572
http://www.cisco-futures.com
dljones@cisco-futures.com
Background
Contents/Data Tables
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).
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 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.
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) .
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.
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.
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.
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.
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
www.cisco-futures.com