Market –structures Logic

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i The 2 Big Questions i 1) Which way is the Market trying to go? i 2) How good a job is it doing in trying to go there?

i 1)MARKET PROFILE IS JUST A WAY OF RECORDING MARKET ACTIVITY AS IT UNFOLDS It

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merely a graph that plots time on one axis and price on the other to give a visual impression of market activity. This representation takes the form of a statistical bell curve i 2) The Time Price opportunitiesͶTPOs i

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i The basic building blocks of the Market Profile are called Time Price Opportunities, or TPO's. Each half hour of the trading day is designated by a letter. If a certain price is traded during a given half hour, the corresponding letter, or TPO, is marked next to the price. i 3) INITIAL BALANCE The price range resulting from market activity during the first two time periods (the first hour) for most commodities is called the uuu

. The initial balance represents the period of time in which  
 
 

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Ͷa range where both the buyer and seller agree to conduct trade. Locals trade mostly in the day timeframe and provide liquidity, not direction, in the market by acting as middlemen between the offfloor traders.

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   POC- Point of control (Longest Print) SEE SLIDE 6 THE POINT OF CONTROL WITH 11 PRINTS was picked up because it had the HIGHEST VOLUME Total prints excluding single prints= 78 and 70% is 55 Value area is 99-21 to 99-28 8) SINGLE PRINTS Unchallenged trade!! BUYING TAIL LOWER PART SELLING TAIL- UPPER PART 9) POINT OF CONTROL THE FAIREST PRICEʹ point at which most activity occurred An upward shift in Initial POC indicates Buying Pressure; a lower shift, Selling Pressure An Alter ego of WAP!! 10) CLOSING RANGE the last ½ hr range

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seller auction price back and forth between them, as balanced, twosided trade ensues1 



  
 

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  RANGE EXTENSION BY ENTRY OF ͚ OTHER TIME FRAME͟ʹ something not seen in NORMAL DAY ----NO TRENDING AND ͚ BACK AND FORTH ROTATIONAL TRADING͛ 3) O%((& SINGLE TREND -- DOUBLE DISTRIBUTION SINGLE TREND; VERY STRONG CONVICTIONAL PARTICIPATION BY OTHER TIME FRAME O=L O=H Trend held on. No violation of Initial one extreme. RANGE EXTENSION, Single Prints and strong Tail ONE TIME FRAME BUYING/ SELLING DOUBLE DISTRIBUTION; Less conviction thou a small INITIAL RANGE which can be overwhelmed; needs to reassure itself. TWO SETS OF SINGLE PRINTS. ENTRY OF DOUBLE PRINTS Suspect rally!!

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 i %(&  but the Initial Base/ range is Narrow and looks as though it is going to be a TREND DAY. Later SEVERAL PRINTS CROP UP and the market moves aimlessly i Trade location OPPOSITE to TREND DAY i 6) %O(& i O$O||)&.$,O$|#O%. "   i MEDIUM INITIAL RANGE ʹ Distinguishing feature i Trade strategy; opposite to trend

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O$)*#O Market structure Trading Logic Timeʹ the Market regulator!! ( %%* Market Structure   
 
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( %OO,)&%* AT OR ABOVE PRV. DAY V/A 2) INITIATIVE SELLINGʹ AT or BELOW PRV. Days V/A 3) Responsive BUYINGʹ BELOW PRV. Day V/A 4) Responsive SELLINGͶAbove Pr. Days V/A See slide 15 for INITIATIVE BUYING and INITIATIVE SELLING NEXT SLIDE for RESPONSIVE BUYING and RESPONSIVE SELLING

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O %%*# If actual O< Opening call, there is a Hidden selling tail there! 4 Types of OPEN ( %(, - %OO(, 4 %#O%, Ë %#O% 1) OPEN DRIVE /.$1| "   #   

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 %O,O(1|O) O(Go with the trend and as early market orders 2) Open TEST DRIVE Tests a known High/ low/ support/ resistance AND REVERTS The failure establishes the day͛s extreme! Human behavior to test! Strategy; No Limit order placement! Jump in and BUY/SELL Run Profits unless single prints are violated!

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   i Ë Open AUCTION can be a result here! i 
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 i    ,1(&%* %O.%|.%%O%((& i ) OUTSIDE PREVIOUS DAYS RANGE i Possibility of TRENDING BREAKOUTS and BIG DAY

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,. but within PRV. DAYS RANGE i Acceptance i Rejection i 3) Open OUTSIDE PREVIOUS DAY͛s RANGE

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i The simple fact of whether a new day opens within or outside of the previous day's range helps a trader gauge two key day timeframe elements: (1) trade risk and opportunity, and (2) estimating, or visualizing, the day's potential range development. The salient concept here is market *
The relationship of the open to the previous day's value area and range gives valuable clues to the market's state of balance and what kind of risk/opportunity relationship to expect on a given trading day. In short, the greatest risk and opportunity arise when a market opens outside of the previous day's range. This indicates that the market is out of balance. When a market opens out of balance, the potential for a dynamic move in either direction is high. Conversely, a market that opens and is accepted (auctions for at least one hour) within the previous day's value area embodies lower risk, but also less opportunity. The acceptance of price within the previous day's value area indicates balance, and therefore reduces the potential for a dynamic move.

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1 SIGNIFIES- Market equilibrium i EXTREME ESTIMATION- Perceived Current extreme+ 1.10 Previous day range i B) REJECTION OF PRV. DAY V/A i Rejection of Pr. Day V/A -)
    
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breaks-out beyond the extremes of the PREVIOUS DAY RANGE, the market is coming out of Balance and the Range is UNLIMITED

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 Unlimited range i B) No trend Double prints. Rotatory market. BUY THE LOWS i b)REJECTION by COMING BACK INTO THE OPEN i HUGE BACKLASH. GO WITH THE TREND i EXPLAIN WAP DIFFERENCES- bcf and scf with an OPEN below scf and entering scf. Huge UPSIDE

Day Timeframe Auction Rotations i  u 


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1Such unilateral control is referred to as a onetimeframe market (a day timeframe u
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1The thin, elongated Trend day Profile,, is a good example of a one-timeframe market1

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  1 Using Auction Rotations to Evaluate Other Timeframe Control %
 
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i Subtle changes occurring within the auctions are often the precursor to dramatic changes that do not appear until much later in the form of tails and range extension. As we noted earlier, if you wait to enter a trade until after the market commits itself, you generally will not gain the favorable trade location that is so important to making objective, rational trading decisions. Tails and range extension are strong indicators, but if you rely solely on them to judge timeframe transition, you will often be too late, for they are   



 
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-ßExtremes i The extremes, or tails, often provide the most obvious evidence of other timeframe control. Tails are created when the other timeframe buyer or seller enters the market aggressively when they feel that price is away from value. Generally, the longer the tail, the greater the conviction behind the move1 i 
  
 
 


no tail on the extreme is also significant. O    
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 "  1In terms of practical trading applications, consider a rising market that shows no tail on the day's low. Such a scenario suggests that it may be wise to take gains earlier than one might if a tail were present, for the market is subject to a possible reversal.

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  1It is important to monitor this attempted direction for continuation to determine the success of the market's attempts to go that way.  


 
  
 
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it is possible to anticipate a change in control by listening to the participants on either team psyching themselves up for a new attack.

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4Ë Although each day develops differently, there are a few general categories of timeframe transition that we can identify: 1. No transition; either one-timeframe or two-timeframe all day; ( +
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Trend day (one timeframe) or most Normal days (two timeframe). 2. One-timeframe to two-timeframe trade. ( +
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price probe beyond a known reference point (such as a previous day's high or a weekly high, etc.) does not attract new activity, causing the market to return to two timeframe trade. 3. Two-timeframe to one-timeframe trade. ( +
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market that is in a trading range near a known reference point that provides resistance or support, then price breaks through and a trend situation results. 4. One-timeframe in one direction to one-timeframe in the opposite direction.

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i  RUNNING PROFILE is constructed to gauge the evidence of a change in control. The following points of discussion use Figure 4-23 to illustrate the changes in control that developed in the Swiss franc on October 12.

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One-timeframe buying control prevails during Y through E periods. Notice the successively higher (or equal) half-hour auction periods. Buyer control translated into buying range extension in A, B, and D periods. The lack of significant downward rotation shows a conspicuous absence of the other timeframe seller. i E: u
In E period, price slows. Buyers spent better than a full period near the high and were unable to extend the range further. Time,    
 
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 1Double TPO prints indicate that the market has spent sufficient time rotating in one direction to justify a potential timeframe transition. The "FG" double prints at .6702Ͷdouble prints below the .6710 E period low-suggest that buyers were not just resting, but had relinquished control. The transition, in this case, is either to two-timeframe trade or onetimeframe selling. It is too early to tell, structurally, which will result. Note, however, that even though timeframe control has apparently shifted, the seller was not aggressive enough to generate a selling tail on the high1The "DE" double TPO print on the day's high represents a high made by time, not aggressive opposite activity. This indicates a general lack of conviction on the part of the seller, and suggests that traders looking for an opportunity to sell this market should exercise caution

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u i When a market auctions above or below a known reference point, one of two scenarios will develop: (1) new initiative activity will fuel continuation beyond the reference point; or (2) the auction will fail to follow through. After an auction failure, price is often rejected in the opposite direction with speed and conviction. The magnitude of this movement  
on the significance of the tested reference point. Known reference points exist in many forms: daily high/low, weekly high/low, monthly high/low, a break or rally point caused by an important news announcement, bracket top/bottom, and so forth. The greater the variety of other timeframe participants who are present at the tested reference point, the greater the potential magnitude of the auction failure.

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To achieve its primary goal of trade facilitation, the market auctions lower to find buyers and higher to attract sellers. Ideally, the market finds a value range where both the other timeframe buyer and seller perceive price to be fair so that two-sided trade can take place. However, the market is effective, not efficient. Consequently, in its attempt to generate trade with all participants, the market occasionally creates excess by auctioning too far in a given direction i       
  

  

 
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i The method for assigning a value to each time period's auction rotation is relatively simple. If the high of the current time period is higher than the previous period's high, then the rotation is given a +1. If the high is lower than the previous period's high, then it is assigned a -1

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