A SIX-PART STUDY GUIDE TO MARKET PROFILE® MARKET PROFILES FROM THE TPO COUNT TO DISTRIBUTION AND LIQUIDITY DATA BANK® VOLUME ANALYSIScp oT WARKET PROFILE® PARTI _ READING THE MARKET PROFILE’ GRAPHIC © Chicago Boardof Trade Internet Address Aup:/iwerw.cbot.com(Care has been taken in the preparation of this material, bu there i ao warranty or representation expressed of implied by the Chicago Board of Trade tothe accuracy or completeness of the material herein, ‘Your legal counsel should be consulted concerning legal restrictions applicable to your particularsituation Which ‘might preclude or limit your use of the futures market described in this material, Nothing herein should be construed asa trading recommendation of the Chicago Board of Trade (©1996 Board of Trade ofthe City of Chiewgo, ALL RIGHTS RESERVED. Printed in the USA.PART I: READING THE MARKET PROFILE® GRAPHIC CONTENTS INTRODUCTION THE MARKET’S ORGANIZATIONAL STRUCTURE ‘The Conceptual Framework The Market Profile® Graphic Kinds Of Range Development Range Development And Balance And Imbalance Monitoring Activity With The Market Profile” Graphic Relating To The Bigger Picture Who Is Most Active In The Value Area? Range Extension Initiating And Responsive Activity 2 34 35 36 45INTRODUCTION — ‘The material inthis si-part Study Guide evolved from a seminar program developed for Chicago Board of Trade members, The émphasis is on understanding the Market Profile® concept—and not on trading strategies—hecause we found that when the CBOT traders grasped the concept, they had no trouble developing strategies consistent with their own syle of wading W Part | discusses how to read the daily Market Profile® graphic, Part IL explains how longer-term trends can be monitored with daily data. 1 Part IIT discusses why the fundamental perception of value is at the heart of every market decision. Part TV shows howe daily and long-term market activity distributes over time. 1 Part V tells you how (o combine market activity and the perception of value in order to analyze a developing trading session. Part VI analyzes Liquidity Data Bank® volume in order to gauge strengtli or weakness in the market We have added a glossary of Market Profile terms and an index to the original text in order to make this updated version of the Home Study Guide more useful, At the same time, we are retaining the early steps in Petcr Steidimayer's breakthrough research discussed in Paris Vand II so that you can sce the logical progression in the devel- ‘pment of Market Profile analysis—from its beginning in a single session to its use in global markets, Although the terms “day (ime frame trader” and “other timeframe trader” may be dated, the way the two groups interact isn't. Traders and investors are stil basically either short-or long-term market pae- ticipants. And their behavior is still determined by thete view of vale. And value is still at the heart of market activity. Therefore, knowing how each group impacts activity in a single session makes i uch easier to understand how they distribute beans, bonds, or €or, for instance, over longer petiods of time. Why? Because iti the interaction between short- and long-term market participants that distributes trading volume in a bell-shaped ccutve. The back-and-forth movement reflects the continual tug-of- \war between the “forward price influence” of long-term traders and the “backward price influence” of short-term market participants, ‘We are also keeping the original examples because the vertical and horizontal Market Profile organization is as relevant in 1995 as it was in 1984—even though global markets have outgrown the single session. The same organizing principles that made the Profile graphic a realistic market model of a ingle session in the 19805 provide a realistic model now of continuous, 24-hour activity. Since the organization of Market Profile data is based on a natural construct, the format simply expands to encompass global activity ‘We show you how to relate the format to the distribution process in lobal markets in Parts IY, V, and VLThe Connection Between Distribution And Market Profile” Data According to the dictionary, distribution is “the position, arrange- ‘ment or frequency of occurrence over an area or throughout a space fF unit of Time” The volume of everything distributes around a ‘mean over time. Why should trading volume be different? From the beginning, Peter Steidimayer recognized that the basic pattern of market behavior isa continuing point, counterpoint: imbalance, balance, imbalance, balance, etc. Now, in his latest work, hie relates this continuum to the process of distribution. His recent research shows that the market’s ultimate common denominator is a balanced distribution in other words, the bell shaped curve. When market activity forms a bell shaped profile, a segment of market action is complete, Stated another way, a balanced distribu- tion is the long-term framework to which you relate short-term moves in individual sessions Market Profile® data captures and continuously updates this development, vaio vai90 si90 bay EVENING NET oy 8-6 P ses P a P 58:13 P 98.12 P Bu P sale oe , oo 0 ‘kta oro ‘TUN oro 0.08 ‘RSTUN Rabe # oon 580s PORSTUYW com oparsuy sa04 Paws rape oPoRsTUY 7803 Psi kine nist sent oP ia asta 001 Ova kn SUA 8 oe srw 731 4 sw 9.80 a W or Ww 18 we or a 18 a 5705 Xe Da ° ora ° 2 a m2 aTrading 24-hour Markets With Market Profile” Data A Valuable Skill Probably the most important change since Steidlmayer first intro- duced the Market Profile” concept is that the day, as a definitive ‘market segment with a definite beginning and end, is outdaced, In 2é-hour matkets, you're working with a timeless continuum. This, nneans that a new beginning ean occur at any time, Despite this change, however, the market's basic imbalance-balance Dehavior pattern is still the same. For this reason, our discussion of Market Profile” begins with, development in a single session and in a simple trend So that you ‘can see how the pattern develops in relatively uncomplicated situa tions. We're using data fom 1986 in Parts I and IT be sessions are especialy illustrative of the market's poit point behavior We believe that once you've seen how the market shifts from imbal- ance to balance in simple situations, you'll he able to recognize the shift in more complex global matkeis, We also believe that market Aevisions are les difficult co make when they are based on a solid foundation. That's why were starting at the beginning and giving you the entire knowledge base, AAs you go through Parts I and II, however, keep in mind that you're going to expand what happens in a single session to 24-hour markets, This means that certain ideas the initial balance and the time/price opportunity (TPO) count, for example—are going to become less important, These ideas will continue to contribute (0 Your overall understanding, but they're going to become part of your background knowledge, ‘Steidimayer’s most recent work relating distribution to market activ ity is not a negation of his previous research. It simply explains the basic concept more fully. His insight into the distribution process pulls the various components together into a coherent whole, Pechaps the most important benefit of Market Profile” data is that it vastly simplifies the trading process Over the past six years, Siefdlmayer has stripped market activity to its essential elements, His research shows that the market has only finite number of behavior patterns and that the finite number is universal from market to market, This means that once you can recognize the patterns with Market Profile” data, the knowledge can be applied in all markets. Since the number of exchanges around the world where you can use these skills is continually grow- ing, your potential rewards can be significant. Because Market Profile” is « tool rather than a buy/sell system, reading Market Profile" data involves grasping principles — not just ‘memorizing rules, Those who make the effort, however, will have a valuable skill. Buy/sell systems lose their effectiveness when markets change. Market Profile” data, on the other hand, captures and lets you See the change so that you ean adjust accordingly. If-you take the time to master each step in this Study Guide, you'll have a solid knowledge base that can help you make futures trading more conservative, more manageable and more rewarThe Conceptual Framework THE MARKET’S ORGANIZATIONAL STRUCTURE [As noted in the introduction, Market Profite® isa decision-support too!—not a trading system. In order to use the Market Profile tools, you have to know what makes them work. That's why we're going to start with the conceptual framework, Don’t worry if you don't grasp the organizing principles immedi- ately. Well be using them over and over again, so they will be old friends by the time we're done. While you may not sense the impor- tance of these principles initially, understanding how they relate 10 market activity is critical, Why? Because these organizing principles explain why market activ ity is not arburary or random. Peter Steidimayer recognized this organizational structure and related it to an overall framework. The idea for the Market Profile product was conceived by him and the CBOT product is based on his original research. Steidimayer identified recurring behavior patterns in the trading pit and then asked himself why they were occurring. Therefore, even though the Market Profile® vocabulary may seem unfamiliar at frst, ir simply describes and explains what is happening in the marketplace As we work with the data, keep in mind that each piece of informa: tion is not an indicator by itself. You'l see that we put several pieves of information together in order 10 come to a conclusion. 10s also important 10 recognize that your market decisions are always going to require Judgment. Market Profile’ can't change ‘that. Unfortunately, it can’t predict the furure but then nothing can, What Marker Profile” can do is help you to understand the present. And if you understand what's happening now, in the pre- sent, OU can make better decisions. With that said, we can begin our discussion of the market's organ: izational structure as outlined by Steidimayer. You'll see for yourself ‘as We move forward that no matter how sophisticated your Market Profile® analysis becomes, it js always going to rest on these basic principles. One: The Auction Framework ‘The purpose of the marketplace is to facilitate trade. What does that mean? In the broadest sense, it simply means that as the price moves up, it brings in more buying of, as the price moves down, it brings in mote selling ‘The marketplace facilitates trade with the dual auetion process. Basically, the market auctions up until there are no more buyers ‘Then it reverses and moves down until there are no mote sellers. ‘The end of an up auction is the beginning of a down auction, ete, All market activity occurs within this broad framework — with the ‘market moving up (0 shut off buying and down to shut off selling. Getting a little more specific, we ean say that the market begins, moves directionally and advertises for an opposite response (o shut olf the directional move.THREE RELATED PRICES Unfair high Untaie tow valu ‘That statement is at the heart of the marker’ organizational struc ture. What does it mean? Say the market moves up directionally and the up move brings in selling. The selling is an opposite response which one stops the wp move-in other words, shuts off the buying—and two causes the market to ceverse and move down, The result: the up auction ends ‘and a down auction begins. Now let's say the market moves up and advertises for selling but doesn’t get any. Instead, it brings in moze buying. Therefore, the market has to move higher to bring in an opposite response. The result: the up auction continues. At bottom, that’s what you're always looking for: continuation or change. 1 Two: The Negotiating Process Now if we get even more specific, we can say that a divetional rove establishes parameters that contain the auction's price range, an unfair low at the ow end and an unfair high athe high end. ‘The unfair low and the unfai high are excesses, ‘Once the market defines a range with excesses at each end, it negotiates within that range to establish value. The market trades between the established excesses until it either trades above the high excess or below the low one, Stop the market at any point in tn see these three reference points: unfair low, unfair mmewihere in between. These three price areas define the negotiating proeess—the method the marketplace uses to facilitate trade, ‘What does this mean in a real market situation? To demonstrate, It’s look at a bar chart of the Dow Jones from April 1987 to the end of October 1989...see page 14 The unfair high on this chart (point A) was established in August 1987, the unfair low (point By in October 1987. You can see that these parameters were containing the market's long-term range at that time. (A new unfair high atthe 2900 level was established in Tune 1990.) Once the parameters at A and B were established, the market negotiated between the (wo excesses (0 develop value. The negotiating process moved value up gradually from the unfair low to the unfair high. Value reached the unfair high (point C) on October 13, 1989. Because of the perception of value at that time, the market coulda’t trade above the high parameter and it reversed. ‘The result: the excess established in 1987 continued to contain the range on the upside until une 1990, In other words, atthe end of October 1989, the market attempted to take out the unfair high. However, when the United Airlines deal collapsed and seemed (o indicate a possible end to leveraged buy- outs, market participants lost confidence and the market reversed,DISTRIBUTING AROUND A MEAN above Mean (fair price) Tp facilitate rade in order to distribute goods and services, the ‘market moves from imbalance to balance to imbalance and back again, It uses this behavior pattern in a single session and in longer term trends or auctions. U the market is balanced, basically equal amounts of buying and selling are present. The market has brought in on opposite response ‘The market is rotating because it has found a fair price around which it can distribute {7 the merke is imbblanced, either buying or sling is predominant. The market is moving higher or lower in order to find on opposie response. The market is moving directionally because its seeking a fair price around which it can distute In brief, a balanced market has found a fair price. An imbalanced market is seeking a fair price. This is simply another way to state the familiar law of supply and demand. Buyers demand and sellers supply. The market is either in equilibrium between buyers and sellers or itis working toward that equilibrium. 1 Four: Steidlmayor's Tondem Time Frame Concept First let's define Steidmayer’s use of the term “time frame!” Time frames are forcing points ~in other words, points in time that force a decision. These points can be imposed by the market (ie, the close) or by something in your personal situation (ie, you have ‘the right to an option that expires in two months). ‘To explain, say the market has been trading for three hours and the close is coming up in 48 minutes. If you don’t want to carry the position overnight, your time is running out. The close is forcing you to make a decision within a relatively short-term time frame. Youre a short-term trader in this situation because the forcing point is only 45 minutes away. You're & longer-term trader in the second situation because your ‘option doest’t expire for two months, The forcing point is two nionths off. Consequently, you have a longer-term time frame in Which you can operate without having t@ make a decision, With this insight, Steidimayer was able to divide all market activity into two categories: short-term and fongerserm. He calls short-term activity day time frame activity He calls longer-term activity other time frame activity. His tandem time frame concept visualizes short-term or day time frame activity on one side of the tandem and all longer-term activi- ty on the other side (hence the name “other (ime frame”), ind short-term activity exist simultaneously in the you have to be able to separate one kind of activity from the other. Were going to separate one from the other with behaviorLONG-TERM BUYERS AND LONG-TERM SELLERS 20 NOT TRADE WITH EACH OTHER AT THE SAME PRICE AT THE SAME TIME, Tor long-term seller Shor and short-term sellers do trade with cach othe 1m Five: Short- and Long-term Aalvty IsDefined by Behavior The short-term trader's behavior characteristic is his desire fora fair price. The best he can do i a fair price because he has to trade {oday. Since afar price is acceptable to both buyers and sees, short-term buyers and sellers db trade with each other atthe same price atthe same ime The longer-term trader's behavior characteristic is his desire for an advantageous price. He can wait for an advantageous price because he doesn’t have to trade today. Since longer-term buyers’ and sellers’ objectives are different, they do nor trade with each other at the same price at the same time, (na strict technical sense, a longer-term buyer with a 10 to 1Sday time frame may trade with a longer-term seller with a tw0- to three day time frame, But these traders are a small part of the total longer-term group, Steidlmayer teats longer-term traders as a is concentrating on the active longer-term market and affects range development.) ingle entity because he der who drives the Longer-term buyers want to buy low; longercterm sellers want to sell high. Therefore, the same price can’t be advantageous for both at the same time. That's why you can know exactly who (buyer o seller) is doing what at any time in the day's range. ‘To apply this untamiliar concept to single sessions or to longer-term trends, i's important to define what an advantageous price means in relation to value, Well discuss what an advantageous price means in relation to longer-term value later on. Here, we're going to con- sider what an advantageous price means in relation to foday’s vale ‘The market develops a fair price area in the session for short-term buyers and sellers in other words, those who have to trade today Most of the days volume oecurs in this fair price area. The high volume shows acceptance, In contrast to the amount of time spent in the value area, the market spends very little time at the advantageous prices above and below value. These advantageous prices are low volume, ejected excess areas. Prices above the value area are advantageous for the longer-term seller; prices below it are advantageous for the longer- term buyer. How do we know it advantageous pr the longer-term trader whois active at Only traders with a longer-term time frame—in other words, those who don’t have Co trade today can take a chance on making theit trade in an area where tie market doesnt spend much time. If you hhave (0 trade today, you cant count on being able to enter your trade in a low volume, basically unfair area, The high volume area ‘where the market spends most of its time provides the liquidity you need I Six: Both the Short-term Trader andthe Lon Role to Playin Fitting Trode This role grows out of their behavior erm Trader Have @Since the short-term trader is seeking a fair ptice, his role isto find a price area where two-sided trade can occur. Steidlmayer calls this ‘an initial balance area. (Currently, it seems to take one hour in CBOT grain futures to an area where 1wo sided trade can occur. Before CBOT financial futures sessions were lengthened, it also seemed 0 take an hour in those contracts to find an initial halance area. Now that the ses sions are longer, however, finding the intial balance in CBOT finan. cials seems to take one hour and 40 minutes.) As the financial coniracts underscore, initial bolance parameters can change, Therefore, the important thing is to understand the initial balance concept—the amount of time it takes the shorter-term trader to find fn area where two-sided trade can occur, Then you can determi these parameters in any marke. Earlier, we said the role of the short-term trader was to find an area that market participants would consider fair. We also said that the ‘market opens and moves directionally in order to establish parameters to contain the range If the unfair high and the unfair low established in the initial balance period hold throughout the session, the shorter-term trader is in control If, om the other hand, the longer-term trader enters the market with enough volume, he can disturb the intial balance and extend the range ~establishing a new high or low parameter. This takes us to the longer-term trader’ role in facilitating trade: his role is to move the marker directionally —in other words, to extend the range up or down. I Seven: Price Can Only Be Above, Below or Within Value Were going to monitor the activity level of the longer-term trader as he responds to prices above, below oF within value in order to antic- pace whether the market will move up, down or sideways. ‘Our focus is always on what the longer-term trader is doing Iheeause, in pursuing his interests, he is responsible for the way the day's range develops and for the length of time a longer-term (rend lasts. ‘Well discuss the longer-term trader's influence on trend develop: ‘ment in Part IT. In this section, we've going to consider his influence fn the way a single session develops. Were going to examine the principles we've just discussed in rel- atively uncomplicated sessions so that you can see how they work. ‘We believe that once you understand haw these concepts work in a single session, you'll be able to apply them to longer-term trends and then to 24-hour markets. Keep in ming, though, that certain ideas such as the initial balance, the TPO count and the kinds of range development are going to become less important. These ideas will continue to contribute (0 your overall understanding, but they'te going to become part of your background knowledge.Stop And Test Yourself Q All act A. The auction framework. ‘oveurs within what? Q, The market moves up to shut off what? It moves down to shut off what? ‘A. Up to shut off buying. Down to shut off selling. The market auctions up until the last buyer buys and then down until the last seller sells. Q. The market establishes parameters and then trades between these parameters developing value until i takes out one side. ‘What is this process called? A. The negotiating process. It is defined by three related price areas an unfair high, an unfair low and value somewhere in between, Q The market moves from what to what and back again in order to facilitate rade? A. Imbalance to balance. Q. There are (wo kinds of activity. What are they? A, Day time frame and other time frame —in other words, short- term and longer-term. Q Short-term and longer-term activity is defined by what? A. Behavior. The short-term trader is seeking a fair price; the longer-term trader is seeking an advantageous price. Q What determines a trader's role in the market? AA. Behavior. The short-term trader who is secking a fair price finds an area where two-sided trade can occur, The longer-term trader who js seeking an advantageous price moves the market directionally.The Market Profile” Graphic Look at the example on page 15. (This material is published in a Sing binder so that you can take the examples out and hold therm next {othe relevant text.) This example shows the Market Profile? traphic for Dec bonds on 9/5/86, The Market Profile® format organizes price and time into & visual of what happens in a single The price range for the session is om the left. The letters show the half-hour time period in which each price traded. At that time, A represented 8:00 to 8:30, B represented 8:30 10 9:00, exc Since then, the CBOT has changed the letters indicating time. In January 1990—in order to accommodate 24-hour markets the CROT assigned a character to each half-hour trading period on 24-hour basis. Half-hour periods from midnight t0 noon are represented by capital letters A through X. Half-hour periods from ‘ngon to midnight are represented by small letters a through x. ‘The day session for U.S. Treasury bond futures now resumes at 7:20 ‘a.m. in“O” period and ends at 2 pu. in “d” period. See page 46 for more information, Although the graphic may look different, only the characters are different. The organizing principle is exactly the same. You're still looking for price reoceurrence in order to see where the market is developing value. In this Home Study Guide, we use examples with the old letters as well as the new ones So that you can see for yourself that the behavior patterns are exactly the same, If you understand the basic principles, you'll recognize the patterns and you won't be confused by a change in characters. No matter wliat the character, each symbol in the profile graphic represents 4 time/price opportunity -TPO for short, A TPO is an ‘opportunity created by the market at a certain time at a certain price These time/price opportunities are the basic unit for analysis of the day’ activity. They are either accepted or rejected. n 9/5/86, the bond futures market offered participants a series of TPOs from 97-14 10 96-04, ‘TPOs from 97-14 10 97-05 on the top and from 96-04 to 96-06 on the bottom were rejected, ‘TPOs from 96.07 to 97-04 were accepted. The atea in which the ‘market spent the most time from 96-11 to 96-29~shows the most acceptance. The rejected areas established parameters—an unfair high and an unfair low-which contained the range. Then the market negotiated within this range to establish value ‘The session on page 15 is the end result of the negotiating process for Dec bond futures on 9/5/86~an unfair high area at 97-14 10 97-05, an unfair low area at 96.04 co 96-06 and value roughly in the middie, a tittle closer to the unfair low. u2 Kinds Of Range Development We're going to look af this session time period by time period s that you can see how the negotiating process works in detail. But before we do that, les discuss the different kinds of range development, As noted carlier, the longer-term trader affects the way the range develops. Now you'll see what that means. If the longer-term trader is not very active, you have shat Steidimayer calls « “normal” day The session we've been examining on page 15 is a normal day: Look at the first column in the profile graphic. Steidlmayer calls this Column the pioneer range because it shows you the First time a price is hit in a session, Look at the graphic and you can see that the range for the day vas established in the first half hour of trading. In 1986, the short- term trader found the initial balance in bond futuees in the first hour of trading—in A and B periods. On normal days, 85% or ‘more of the range is formed in the intial bolance period. Any range extension is usually slight and occurs late in the das. In other words, the short-term trader basicaly establishes parameters for the day's range. Then the market rotates between those parameters for the entite session. ‘What is the characteristic of a normal day? The short-term trader sets the parameters that contain the range, In other words, the short-term trader isin control, The market has found a fair price and is distributing around it If the longer-term trader is more active and extends the range past the intial balance area, you have what Steidlmayer calls a “normal variation” day. Look at page 16. The market's initial balance is found in CBOT sgrain futures in the first hour of trading, (In D and E periods at ‘hat time; now in T and U periods.) Look at the pioneer range and you can see that the initial balance area covers 621¥% to 628, In G period, the longer-term trader came into the market with enough volume to tip the markets initial balance and extend the range. The range extension started at 62814 and continued up to 633. What is the characteristic of a normal variation day? The longer-term trader extends the range past the initial balance The short-term trader's initial parameters do not hold. There is some directional movernent which extends the range and sets a new high or low parameter.{In this example, the range extension is approximately double the initial balance area. Therefore, control is roughly divided between the short- and the longer-term tradet. Ifthe range extension were wider than the initial balance, the longer-term trader would be in control. That's why maximum range extension on @ normal variation day is roughly double the intial balance area, Is important to keep in mind, however, that this is the maximum, ‘The range extension on a normal variation day isn't always that wide. Tt ean be anywhere from a few ticks to shout double the initial balance. Naturally, the wider the range extension, the greater the influence of the longer-term trader. When the range extension is considerably more than double the initial balance area, you have what Sreidlmayer calls a "trend day. Look at the example on page 17. This isa grain future and the ‘markets initial balance is found in the first hour of trade-in D and E periods here, The initial balance area covers 502% to 50814. Its roughly % of range and the range extension from 50S to $11 —is roughly % of the range. You can also see that the market moved in ‘one direction all day. The longer-term trader kept extending the range up=first in G, then in T, J and K periods, ‘What isthe characteristic of a trend day? ‘The market moves in one direction and closes on the directional extreme, ‘The longer-term trader is in control. The market is moving direc- tionally in search of a fair price. ‘When there is range extension but no net influence from the longer- term trader, you have what Steidlmayer calls a “neutral” day. Look at page 18. The longer-ierm trader first extended the range down in F period and then changed his mind and extended it up in L period. Neutral days indicate uncertainty. Often the market uses these days to change direction. What isthe characteristic of a neutral day? ‘There is range extension in both directions. B“4 To Sum Up Ic helps to think of control in terms of range extension. When there is no range extension, the short-term trader isin control When the longer-term trader sets « new higher or lower parameter at one end of the range, he is exerting more influence. If the range extension is roughly double the initial balance area, control is roughly divided between the short- and longer-term trader, If the range extension is considerably more than double the initial balance area, the longer-term trader Is in control. When the longer-term trader extends the range in both directions, cone range extension generally cancels out the other, In that case, the longer-term trader has no net influence on the session, Therefore, the short-term trader is basically in control. Dow Jones Industral Average: Weekly Bar Chart i af i tl fn E shia aM i ih ; Alay or oot INormal Day: A Balanced Situation MARKET PROFILE (CROT US BONDS Trade Price grag sre or in sr ute sr ioe 1 0 7 7 7 7 7 7 7 7 918 ast 13 a 5132 a3 ast 13 un ve 3112 94.30132 96 29/32 94 2082 94.278 96 0632 962592 94 1482 94 2332 v6 2282 96 282 98 108 56 198 96 1982 58 17 56 162 96 152 96 42 961982 96 1289 senna 96 1032 % % % % % % oi wa? met 932 sit 32 Pioneer range ‘Market Profile” Graphic Copyright Chieago Board of Trade 1986 Bee) ALL RIGHTS RESERVED. 86/09/05 _HalfHoor Brocket Times Rejected TPOs Unfair high area “ % % 16 6 asa AGAR ESA ESHA ASH AEFHIL Accepted TPOS ATHAL AEH nc AREF ARCOEFHUNL | Value area ARCOEAL ABCOTRUL ABCOELL MOLL ABCoELL ABELL AwoEUL ABDUL Anco roy a 1 a am 1 Rejected TPOs Ui | Untaie tow area 1816 Normal Variation Day: Combination Of Balance And Imbalance MARKET PROFILE" SOYBEANS, Trade Price 6 sana sat ani an ela ein ae a 630 34 30.17. 630114 0 29 314 agin 198 m9 18.4 eit m0 om an 3 oui era ar 84 4 808 17. 806 1 a6 a5 44 e512. ast as esi a4 erase a3 sa a sm 3a enn iit e214 mn ani 3i¢ ain Marke: Profs” Graphic Copyright Chicago Board of trade 1968 Mar G8) ALL RIGHTS RESERVED, 88/01/22 Hal Hour Bracket Times fee 1 ik ik ak mK ig m m x x x Uk i] uk ik Hx SKK HK SHIR FG DG Deca DITGH DErGH ons rd OF OF 0 Range extension upTrond Day: An Imbalanced Situation MARKET PROFILE" SOYBEANS Trade Price su Sioa sion Stowe si0 59 ue 59 2 509 sora sar 1 sara 507 08 a4 506 12 506 16 08 508 34 505 12 05 1M 505 soe 94 soe 2 So 18 54 5334 5a 2 5a 14 508 507 ia sar ut sar 4 ure role” Gapie Clpegh Cheap Rw of Fade Sore ALL RiciTsAEseReD S708/9 Hl Hor Baa Tees t t t t K X te i ut tt Mt | eonge extension oy ety oa oH oH oH et a > 1 Os Tis OG UF Initial balance 0Neutral Day: MARKET PROFILE® Marke Proie” Geaphie Copyright Chicago Board of Ted 1988 A Balanced Situation CSOTUSBONDS Sart) ALL RlGHTS RESERVED. 01/07 Ire Pre Halt Hour Brkt Tes a am uy int t i 1] Range sa 1 | extension ap sa t i t ia t 1 a ist iL fou aun ‘on ia ‘oi ot Adi ann Acne oni Acca at Act asa Ancothia ou {cco nat ‘ce nat Beioauk nee trun joist nici arin tick a tn at ure a aK isa i am oun fF on down Range Development And Asrategy that works when the market is balanced and rotating Balance And Imbalance (trading range market isnot going to be appropriate when the ‘market is imbalanced and moving directionally (trending market). Thus an ability to recognize the difference can have a major impact ‘on your botiom Hine. When the longer-term trader has the least influence, the market is ‘the niost botanced, ‘What kind of range development is balanced? Normal days: the entire range or roughly 85% of the range is formed in the intial balance period. Therefore, there is either no range exiension or very little range extension, 181 Nevtral days: one range extension generally cancels out the other 0 thee is no net influence from the longer-ietm trader As the longer-term trader’ influence increases, he creates an imbalance. ‘What kind of range development do you have when the longer-term trader introduces imbalance? 1M Normal variation days: the longer-term trader extends the range past the inital balance ares. Specifically, you have balance Imbalance and then adjusted balance. On the most imbalanced normal variation day, the range extension roughly doubles the initial balance area When the longer-term trader exerts maximum influence, He market is the most imbatanced. ‘What kind of range development do you have? Trond days: the market moves in one direction and closes on the directional extreme, The range extension is generally more than twice as long as the initial balance area. |. Kinds Of Range Development NORMAL > Short-term in control > Balanced situation, ~ 805) of the volume is short-term; 20% is longer-term. EUTRAL > Short-term in control > Balanced situation, > 700% of the volumes short-term; 309% is longer-term NORMAL VARIATION is divided. > Cont > Combination of balance and imbalance. ~ [fa ite range extension, 80% of the volume is short-term; 20% is longer-term. IF fot of range extension, 60% of the volume is short-term, 40% is longer-term, TREND. > Longer-term in contro > Imbalanced situation. > 404%» of the volume is short-term; 60% is longer-term, 19Stop And Test Yourself Q. There are two kinds of prices. What are they?” ‘A, Accepted and rejected. An accepted price areas simply a price ‘area where the market trades over time. Accepted prices show valu ‘A rejected price area is simply a price area where the market spends very little time. Rejected prices show excesses in the market —an unfair high and an un fai low: Q. There are two kinds of activity. What are they? AA. Daytime frame which i short-trm activity and other time frame which is longer-term activity. Q Activity (short-or long-term) is defined by what? A. Behavior. The short-term trader is secking fir price. The longer-term trader i seeking an advantageous price. (Q. Whatis the role of the short-term trader? AA. The short-term trader establishes an initial balance area so that two-sided trade can oocur Q. Whats the role of the longer-term trader? A. Thelon; erm trader moves the market directionally Q. Which trader is responsible for the way the range (normal, nor- smal variation, rend, neutral) develops? A. The longerterm trader In other words, the amount of activity executed by the longer-term trader determines whether the market is balanced and rotating or imbalanced and moving directionally ‘The more influence the longer-term trader exerts, the greater the range extension and the more imbalanced the market. Q. The market moves from what to what and back again in order {0 facilitate trade? A. Imbalance to balance.Monitoring Activity With The Market Profile” Graphic* Now, we're going to look at range development in greater detail Basically, all activity in a session can be included in three categories: activity that produces single print extremes, activity that produces range extension. activity that produces a value area ‘To get as much information on the longer-term trader as possible, Steidlmayer divides the range into these three areas extremes range extension and value area—and monitors the longer-term trader's behavior in each area. Even when the longer-term trader is least active (on normal days) he still can influence development on the extremes and in the value area. So well start by looking at the extremes and the value area on normal day. Fares, we said the market establishes parameters and then neyoti= ates between them, developing value. This is the negotiating process ‘To help you see how the process establishes parameters (which are extremes) and develops value, we're going to examine the session on 9/5/86, time period by time period. Before we begin, though, some background, Extremes are formed when the longer-term trader competes with the short-term trader for opportunities at that price level. The more eager he is to compete, the longer the single print extreme. To show that the longer-term trader was interested enough to com ‘pete, you need atleast two single prints. One single print shows you that the market offered an opportunity and no one wanted it ‘The more single prints there are, the stronger the competition. With that said, let's look at the session on pages 22 to 33. Keep in mind that extremes are formed by competition; the value area is Formed by rotations, “Toe Make Pre grepi copie hy the Chiego Bose 9 Tae 198, AI Rights Rew a2 The Market Opens And Moves Directionally MARKET PROEELE SBOT US BONDS Trade Paice om sry eR 79 paied 7 9B 7 am a ie aime 56 3082 6 7 56 1 96 282 56 2182 96 05388 612 54.2352 58210 S680 4 a : a5 12 96 162 96 1587 36 1482 36 1362 96 1980 561182 96 1082 56 982 56 wa 56 7132 36 6 Sia 36 47 For the sake of simpli 97-44. To Pars IM, we’ and the implications, ty were gol t0 say the market opens al discuss exactly where te market opens ling moves dhe market out of the arca down t0 96-04, We snow it was selling becaase the market moves down to shut off selling. As the marke: moves down, itis advertising far an ‘opposite response. '% There is so much competition from the loager-term seller hn the short-term trader has to move the merkst down more that pointEstablishes Parameters Market Proiet Graphic MARKEY PROFILE” Copmright Chicago Bou of Tade 1986 Chow os nosis Deets) ALL RIGHTS RESERVED. 809 Nell Hour Bracket Times sr laa Dal 97 ost 31 98 7 at 97 732 7 43 a7 5/32 7 43 a7 432 7 1m wm 565: 54140 56 742 Re 56210 96 732 6 19a 96 18 seat 961332 a 361182 96188 ans opposite expanse at 9608, ‘The by in and the market trades up, We know it was the bayer because the market moves up to shut off baying, WE The market rotates up in B period to 96-23. Weve & inidial parameters, Will they hold? tablishedPy Finds The Bottom Of Value MARKET PROFILES Cop Marker Poot hc Chicago Bard of Trade 1986, BOT US BONDS Dec (86) ALL RIGHTS RESERVED, 8609/05 rode Price Half Hour Bracket Ties sr 4g 97 13m 97 1080 Sr iit 57 08 7 CA 7 7 0 7 7 7 7 7 56 3100 54 3082 96 1982 96 1882 so 77m 96 2602 96 2581 96-2482 56 2392 96 2090 ae 96 105 96 1982 % 96 V2 96 6/32 361587 56 432 % 96 1082 a 61072 % % % % % % ® = yat ust Tat one sat a ya wat an 4 4 A a 4 A A 4 4 4 4 4 4 4 ‘ A 4 A 4 4 My 0 a a 1832 2 9882 ua wa a2 iat a3 i ® ® x x a 4 A The market gets an opposite in C period to 96-07. response at 96-23 and rotates down, The C period move is testing the low parameict. I takes out some of the initial extreme bat baying comes in at 96-07 and the parameter holdsDevelops Value Mares Prof” Gaphic MARKET PROFILE’ Coy Cato Bow With Rotations CHOFUS BONDS. Deviiel ALL RIGHTS ESE Trade Prive Hl oor eat Tes aa A a3 4 a a a a ana ri 748 4 7 an A 0 me A 2 om 4 53 A 7 3 1 Dm A i A s i A 4 i A 4 & 0 am oa a eed 56 3032 aed 56 St se 22 96 2682 96 252 36 Mt A se a pd S sone tae 5602 ANG Se 1982 NG. 6182 A so ri AK 4 6 we wer we sara aK 961392 AKG 96130 1 se Me pa a 96 902 rg 58 6 % 6 6 1 The market rotates up in D period 10 96.21 1B Because the marke: is rotating ap and down, it appears to have found an area in which two-sided trade ean ogeur. [a other ‘words, selling at the high and buying at the low nay have defined she range. Iso, the market can slow negotiate beuween the paranteters to develop value 1 The market ested the dowaside in C period hut it coulda’: trade ‘below the unfair low, We may be dealing with « normal day:Expands Value Market Profile” Graphic MARKET PROFILE’ Copprieht Chicago Bead of ‘ade 1986. To The Upside ‘CBOT US BONDS | Dev (86) ALL RIGHTS RESERVED. 86/09/05 Trade Price Hal Hour Bracket Times 7 1m ola 9713 sr Cane 7 7 ” 7 a a 9 7 7 a 36 5192 54 3092 96 19 56 36 1700 96 1492 56 156 56 482 96 138 56 1780 56 21532 96 1080 96 19130 96 1932 96 132 96 1182 56 1582 496 1132 96 ist 96 1282 56 1182 6 102 %6 56 6 5% 6 6 % 93 an 13 37 sig “a 4132 ae va 903 33 7a ot Si 00 The market scars 10 rotate up in D period. The up move attracts more buying in E period. The market rotates up 0 96-26. The up move, instead of bringing in an opposite response, is bringing in a like response. The up auction is continuing. Its expanding the value areaExpands Valve Again Marke: Pcfe” Graphio MARKEY PROFILE’ Copyright Chicago Hoar of fade (B07 US BONDS [Bec 86) ALL RIGHTS RESERVED. 86/004 Trade Pree olf Mout Bracket Times sr ag 37 1982 eat arin er oan or 930 57 a ara 97 682 7 582 7 4a sr yar ar se 7 82 7 98 8182 96 3030 6192 pan 5477 5616/92 94 25/32 962432 5632 54 20130 36 10 96 2032 94 1952 56 1a 561782 800 pare soe 94 1932 ics 96 142 aCe wR no 96 1220 20 361g aK 8 10 rg ig m aw A 4 A 1 |e | REGRET eee eee seggaeeee 96 9a 36 at 36 78 %% 50 46 52 6 43 & The up move attracts more buying in F period. The marker oLaes up 10 96-29. Note th continues 1o bring in a like response, the up auction is eontina ing. The market continuing to expand the value area n2% Still Expanding Value MARKET PROFILES Copyieht Chic (CROT US BONDS Doe (8) Al os of Tre 1986 TS Re Trade Pre Half Hoor Brockt Times 97 432 or 382 97 is a7 iis 57 108 a 7 7 7 7 2 7 7 ” 7 96 31/92 96 3000 96.1980 9618132 sn 96 1680 96 1587 96 1082 96 1382 94 202 962162 96 1082 % 56 1802 % 96 1682 6 % Se 1382 % 56 1192 96 102 6 6 % 3b 6 % 382 wa 13 on 513 on 38 uae vn war a2 1582 a1 1232 913 an? 131 63 Sit 3 RVED, 86/00/08 Buying activity continues in G period and the market rotates up to 97-04. initial A peried extrome at the top. Yow ean see that the wv is using the entire range 19 develop value = Note how the expanding value area is taking out some of the hetFinds The Top OF Value exe? pRortst® 1a Yate 8% EHOntA oNDS — beetay) Ati nites Restate Sonos Trade Fe al er Bracket Times arias ‘ eae k oe 97 1032 A . aie _ e ios A 1 : a sy 57 ae a | a 1a to | ow : aa i | Sia i oa we ole ia & 7 at 6 nia i . 7 & Sam is Saar rc se os ed tee wenn Noe ad uP Ss ur sna ue wae ini seine site snat ers sean ss wiser oe wat ABE sna Ho wena mo 9652 ag win 88 sia eo Siew a0 sine 0 46 oa rs 8a i % 8 i Im K 2 # % Sat A A & BB At 97-04, the market fas moved high enouah to bring in an ‘opposite response: The up auction ends and the market slats 16 ovate buck dows, @ Noe shat the end of the up auction isthe beginning of the down action. Ip other words, Gre end of the up rotation in G period beginning of the down rotation in H period. B Also acte how the ap move overlapped time periods. IF yon. bought at 96-11 sn D period, you did't have & oftset antié G. period when the market brought in an opposite response song enough to reverse the ip move, 2»30 Continues To Develop Value With Rotations MARKEL PROMILE" — Coptigh! Chicago Bra of Tate 1986 BOT US BONDS. DeeiSS) ALL RIGHTS RESERVED, 86/09/08 Trade Price Wolf Hove Bracket Times sr asa Dat 7 na sro 7 7 51 7 7 a Df 7 2 ” 962190 6 3092 ss 190 96 202 6 56 wR 96 2580 96 48 96 23182 96 223 se 56 2087 6 92 % 6 % 6 6 6 % 6 % % % % 6 % % 1132 9192 32 1 a sim a 132 am vat sia v3 3c 15182 wat gz 82 nae wa 982 wa? 13 32 sit 42 ‘Tho down move brings in more selling. | poviod starts trading at 96-22 and rotates down to 96-09, The down auction that began in G period is continuing,Rotates Between Parameters MARKET PROFILE CHOT US BONDS. Trae Pree ar wee 3382 arnast are arse 0 u a 7 a 2 a a a a 382 ane 13 br 132 wa 32 ase vat se 3192 54 3092 se 20 su 96 27 6 2492 prod 3682 peor ene em ema 36 19 %4 1802 os Ura? 96 187 96 158? 96 149 62 36 1232 % sug 563032 6 % % 6 2 AL 96-09 in T period, the selling seems 10 dey up. fn other words, it seems as though tive last seller has soid and the down move SOPs mE 52 23 2 43 58 Denisa) ALL ° 5 Cticago 0 of Tae 1986. RIGHTS RESERVED. 8601-05 Holt Howe Brecket Ties yes in and the market rotaies up to 96-21 in J period, BDefines Value More Precisely Market Profile Graphic MARKET PROFILE Copyright Chicago Boat of ade 1986, Chor US HONDS. Des (8) ALL RIGHTS RESERVED, 86/004 Trade Pike Half Hour Bracket Times or laa a or aa A 7 a i arise a sr 19a? a 1 A 7 A 0 A | nT 4 0 4 n a6 a1 6 ar “6 I 4% 7 46 4 a2 ins 94 30032 A 36-2982 AGH 4 298 Ah 54 27132 Ah 94 25182 AEH 4 592 A 54.24/32 APA 94 23/32 Bee sere A 54732 ARCO 94 72052 OER 96193 OFA %6 192 aaa sea ABCOEL 6169 ACE e152 ABOEL 961997 scons 61339 ato 967 A300 se 1 230 96 1082 a 56 980 aw 56 ag ig 56 782 at 56 im 4 56 52 A 56 4 A 48 The up miove brings in more buying and K period continues the rotation up to 96-31, 28 Note thal the rotations are starting to define value more pre cisely. The market spent the most time between 96-29 on the upside and 96-11 on the downside.TPO Value Area Complete takes Prete? Graphic MARKET PROFLLE® — Copyriehi Chicogs Board of ade 1986 CBP ES HONDS bee Qe ALE RIGHTS RESERVED. 1/0008 Trade Price olf Hour Bracket Ties sian S732 sn tise sri 5710 7 an sr als 132 7 om 7 82 a1 4 pa 0 ae ar 2 u 56 312 63092 962952 6B su a72 54 262 415932 sen su 32 542039 seni se mad Dara oe ast eat wwe 13e eae wena 46 122 Ena 96 10087 v8 9 6 3 % % 36 992 36 42 ‘he unt sotaes dow in Sat 5 Fined an untae oa fv 9 ing. process ‘unten low |B Toe mnrkes nopitiated along the eotte ange to find the pres area that precisely ragzesenied valu, I ested the upside i G period wd the downside ts € pevie. session, the range ihas mast precisely represented value was -d by 9628 on the upside and W612 on the downside, This was the fs whic 208 of rhe day's tae ocurred ~ tho wodome vue oe BF Whar Stidinnyer cals rhe “TPO vale arg i defamed Hy 97-04 o she apse and 36.07 oe the deus, This the area covered by the ‘lug area fvations. Rotations in © and O periods wok ont sone oF B the nial A peried exreicesRelating To The Bigger Picture The longer-term trader was relatively active in the value area on 9/5/86 because the rotations are relatively wide, When he is not very active, you have a session that looks like the example below. This isa profile of bond futures on the day after the Thanksgiving holiday, 11/24/89~a traditionally inactive trading session Volume for the Dec contract on 11/24/89 was only 116,840, There are no extremes, « two-tick range extension (the entire Fange was only nine ticks) and extremely narrow value area rotations, Marker Profle” Graphic MARKET PROFILE" Copyright Chicago Board of Tade 1989 Cagr Us BONDS Bee (9) ALL RIGHTS RESERVED 89/11/24 Trade Price Half Hour Braket Times 59 7982 oor 59 282 AEF win AOE 59 26132 Tac 9 75I8 TAH 59 2480 TAGE wn ‘SFGALML 59203 FUL sana F ‘All market activity is essentially a variation of the two types of behavior you've seen in this session: WM behavior that results in an imbalanced directional move. WM behavior that results in balanced rotations Te imbalanced, directional A period move dovn occurred because ‘market participants were seeking a fair price. The halanced rota- tions occurred hecause market participants found a fair price at 96-21 and were selling above and buying below. Understanding these behavior patterns will make react quickly to opportunity as the day develops. easier for you t0 Each kind of day~normal, normal variation, trend, neutral ‘creates a different kind of opportunity: a balanced situation creates ‘opportunity with rotations; an imbalanced situation creates oppor tunity with a directional move Youll be able to trade earlier and more effectively if you recognize which situation you'te dealing with For example, if you recognize a normal day early in other words a balanced sitiation, you won't waste time on strategies that capitalize ‘on substantial range extension. Instead, you'll concentrate on buy” ing the low and selling the high of the value area rotations, Consider the session we've just examined. Look at page 33. ‘The early parameters established in the first half hour contained the day's range. You were dealing with a balanced situation so there was no opportunity to se atthe low end of the range after the buying came in at 96-04Who Is Most Active In The Value Area? — value The longer-term trader believes value will be higher next week, The longer-term trader is w to buy here in today’s value Drecause he thinks value will be bigher next ‘ee ng at the of today's value is advantageous in relation to his, longer-term on of Today's value area Extreme ‘As value developed between the parameters, the longer-term trader tested the low pazameter in C, I and J periods. But it held because the longer-term trader never came into the market with enough volume to tip the initial balance. The result: no range excension. ‘Therefore, recopnizing the down rotation in C period as an oppor tunity co buy would have given you an edge. Now that you've seen how a value area develops, we're going to determine which longer-term trader—buyer or seller is most active in the value area. Although they're both going (0 be active at various times in the session, we are looking for the net influence at the end of the day. We ace able to make this determination because che longer-term trader has a known behavior pattern when he trades in the value ‘The behavior pattern: the longer-term trader gives up an edge in order to make the trade, Hes willing to do this because something Unat is fair io the day can be a bargain in a longer-term time frame. ther words, when the longer-term trader makes trade in the rea, he is buying low or selling high in relation to longer- {erm value —not in relation (o today's value. The behavior pattern’ effect: an imbalance in the value area, If the longer-term buyer is most active, the value area is slightly too high because he is willing to buy ata slightly higher price. If the longer-term seller is most active, the value atea i slightly too low because he is willing to sell ata slighty lower price. How do you find the imbalance? Look at page 38 on the left. Use the fairest price in the value area—the price that trades in the ‘most time brackets—as your reference point. If more than one price trades in the same number of time brackets, chovse the one closest to the mid-point of the entire range. Were taking the one closest (o the mid-point of the entire range because, aS you Saw in the example we just went through, the ‘market uses the entire range to find value. Ic establishes parameters and then negotiates along the entive range between ther Draw a line through the TPOs opposite the fairest price. ‘Now count all the double prints above the fairest price and all the double prints below it. (Double prints refer to any row of TPOs ‘opposite a price in the day's range with two or more TPOs in it.) Were counting TPOs hecause they represent market activity. In this ‘example, there are 70 above and 89 below: ‘The imbalance we are looking for is on the side with the “east amount of activity because the longer-term trader is only a small percentage of total trade in the value area, To explain more fully, the value area is primarily for traders seeking 2 fair price. 35Range Extension ‘Therefore, the side with the most activity Aas to be short-term activ- iy. That's where the price in the value area will be fairest. In other words, no one is giving up an edge there, Returning to this example, the side with the least amount of activity is above the fairest price. Since the market moves up to shut off buying, the longer-term buyer was most active in this value area, There are more value area examples on the right and on page 39, ‘You don't know until the end of a session which longer-term trader ‘was most active because the seller can be most active at one point and the buyer at another. Consequently, the value area can be slightly too low at one point and slightly 100 high at another. To demonstrate, see page 40. It’s not necessary to do a TPO count on trend days. Itis obvious from the rotations which longer-term trader is most active in the value area because the market is moving in one direction. Look at the trend day example on page 17 again. Now we'te ready t0 examine the third form of activity: range So fat, we've looked at extremes formed by competition and the value area formed by rotations. Range extension occurs when the longer-term trader enters with enough volume ta tip the market's balance. ‘To examine range extension, look at the example on page 41 Look st the pionzer range (first column in the profile graphic). You ‘an See that the initial balance area covers 608 to 602 1/2. The long- term seller entered the market with enough volume in F period to tip the initial balance and extend the range down. Range extension down continued in G and K periods until it about doubled the initial balance area. Who was responsible for tipping the market's balance? We know lt was the seller extending the range down because the market maves down to shut off selling. Also note that the single prints in K period do not form an extreme at the low: The K period range extension is an untested price probe The reason: K is the last trading period in the CBOT grain con- tracts. Therefore, we don't know for sure if the market traded low enough to find an opposite response. There may have been competi- tion from the buyer but we can't be certain, In other words, com petition coulda’t be confirmed by subsequent activity because K ‘was the last trading period. Consider the D period extreme at the top of the range. D was the market’ frst trading period. So you know that the seller ‘was competing for opportunities at that level, His competition was confirmed by the trading that occurred later in the sessionIn K period, on the other hand, because there was no subsequent trading, you don’t know for sure that the market went low enough to bring in an opposite response. Confirmation will have co wait until the next trading session Look at the soybean example on page 42. ‘On 6/15/90, the marker tested the downside with a price probe in K period. TThe next day's lower opening brought in buying. Competi- tion from the buyer was confirmed by subsequent trading. ‘On 6/18/90, because of the single prints in D period there s no ‘question that the buyer was competing for opportunities at that tevel Before we go on, there's one more thing to point out Look at he example on page 43 This is a soybean report. Therefore, the initial balance area is $59 to 364 1/2 (D and E periods). The longer-term buyer came in with ‘enough volume (o tip the markets initial balance in F period. LHe extended the range up in F period and the range extension con- tinued in G period up to $71 1/2. At that point, the market moved high enough to interest the longer-term seller. His competition formed an extreme at the top. ‘Two things happened herein the same price area hut not at the One, the buyer extended the range up to $71 1/2. Tivo the seller was attracted by the opportunity at S71 1/2 and his competition formed an extreme at the top. So in this example, you have range extension up—buying activity — and an extreme at the top—selling activity. ‘The market moved up first to shut off buying and then down to shut off selling, The buyer and the seller were both active at the high end of the range bu! not at the same price, at the same time. ‘This is an example of their trading in the same price area at dif. ferent times. ‘The long-term buyer and the long-term seller did nor trade with ‘each other at the same price because the same price cannot be ‘advantageous for both at the same time. Thats why we can identify ‘iso kinds of activity at the top of the range—first buying and then selling ‘That's the frst step in monitoring the longer-term trader's activity knowing whether he is buying or selling in the three areas of the range. The second step is to determine if that buying or selling is expected or unexpected behavior. But before we go on, stop and test yourself on the material we've just covered. The testis on page 44. a7Value Area Activity MARKET PROFILE" MARKET PROFILE? Cao Us BONDS SOYBEANS Markt Profile” Graphic Market Profle” Graphic Copsrght Chicago Board of Tad 1986. CopyiehChieaso Bow of Tae 1988 Dee (G6) ALT RIGHTS RESERVED. 85/8/05 Sal's) ALL RIGHTS RESERVED. #04713, Trade Pie Half Hour Brcket Times Trade Pie Mal our Brockt Times srg 4 win D sr iy A 1 ° ain A 6 o arin A eon 0 sri A 50 5 57 98 a 0 D or as a ean 4 D 7 Int a ae oe 57 a a oan 4 oe moat 4 . 3 Hi a ry 28-1P0s 57 3a a6 ty | 8 1PO m7 2a re | sr 1a a6 otra | 7 6 sara DEFWK seat Gk grin BORK — Fares price 960% HL i Dersiak 96299 J -1POs oT oH os 200. AGL ss 34 EEHIK | as tos oan AHL ses U2 roa | wan tera | a au | % 25/37 ‘REFHKL 686 cuuK | 96 24/32 THR, | 85.34 ou) 5678 eerie | V2 | 2D ABEFHIKL, } 962182 aoe Frirest price kr a 96 07 awcoenuL B43 9619882 spent | ot i 961032 Bom | a k os nr noe 9 162 AREUL 561582 aoe 1 oe ta secon, | 8 TRON 961382 wou | se 23 BC) osu cou veo a 96 98 au 96 Bn? x %6 32 ie 9% 8 A 96 532 a 96 430 A The least amount of activity is above the fairest price, Since the market moves up to shut off buying, the buyer is most active in these value areas.an Market Profs" Graphic Value Area Activity MARKET PROFILE? Copyriht Chictzo foot of Fade 1987 SOVIEANS ‘Mor (8) ALL RIGHTS RESERVED. 9/11/27 Holt Hove Bracket Times E t sal ue E aly w ai ca a w 20 314 w 20 12 w ens a a0 ru sis roux | $7 TPOs sig 1 oH sv HL ay aK sib rca . sini —£f6ttsk = Fairest price sn cK a8 LK en ik at rik on i a7 ny 37 TPOs 1634 & sis 2 OK sls aE 15 34 oe isn oe as D 14 D eat D e144 D oe D eg D eM D aa D sina D sit D oni D ra D S10 12 . The least amount of activity is below the fairest price. Since the market moves down to shut off selling, the seller is most active in the value area,Activity Can Shift In The Value Area Market Profle” Grape MARKET PROFILE’ Copsight Chicago Board of Tade 1989 CBOT US BONDS Mar(@5)" ALL RIGHTS RESERVED. §9/00/05 Trade Price elf Hour Bracket Times Trade Price Nel Hour Bracket Times v4 na a 94 2382 D 4 20132 a 4 282 D 94 9182 4 21132 a0 941032 1 TPOs 94 112 we -20TPOs varia 941982 sacoe 9418132 94 192 Sacoe 94 \5ia2 atria sco oa aia 9416132 Bite 941382 34 582 at v4 12/32 1 tPos ast Cag TPOs satan pita Hac 94 1082 44 1282 me sa uae st 94 1082 5 TPO boxing TPO seting Trade Price elf Hour Brocket Times Trade Price Halt Hour Bracket Times 543157 X 54 3032 fix 4 B92 ik 94 ta Sil an alk 94 2692 F 34 1682 FoHUK 50 TROs sa 51a f 54989 FH. 54 N32 F 5448 FH 942302 of 18 TPOs a DrGHKL sana oF sais or sania waning DESH s4 7092 sero 204FoHL sai 94 1989 4 1682 94 1032 4h sa 4 2 4 62 TOL 42 TPO 94 sa 2 1POS 941590 Hd 4 4n2 94 4a Ra 4 1382 pita at 4 10h 4 Iti ati oa 4m 94 1082 You don't know until the end of a session which longer-term trader was most active because the seller can he most active at one point and the buyer at another. Therefore, the value area can be slightly too low at one point and slightly to0 high at another.Aative Enough To Tip The Balance MARKET PROFILE? SOYBEANS Trade Price oe oor 34 ora e071 7 605.44 052 405 6 405 314 605 2 05 4 0s S04 314 0a it oe i ue 314 a3 8 14 3 rier Initial balance war aan sor a4 ain sol 14 ry 00 v4 00 17 600 14 600 sm sant a9 09 sau sae it sou it sor aie smu sor a a1 sa su 596 Not an extreme Market Profle Graphic Copyright Chicago Hoard of Trade 198, Mar (G8). ALL RIGHTS RESERVED. 48/02/02 Hol Hour Bracket Times Competition From the seller Torms extreme | oe oe a u BK IK ero IK Fok rok UK Fou uk roux HUK HK | cHUK HK aK ak alk ik ak Guik | Range extension w« x x x a | 412 Dec 90 Soybean Futures an eae ins a0 ei ans i246 ean an ar aie aio ant 194 6186 a0 an set 156 4130 sian oi3e ni outa en sine 078 90 oa on 4s neo as a ee a0 wn ole 008 00 st TE | > OTH Desa DESH | DEFSKU EFS ero | Diok ork m x +0 D D ia ira mt E & & F EK ) i ery Foe oe roa I) percu HK DeFCHUK chk} OgFCHK Hu DEGHUK a aK u ci 4H xk Vay K Untested fg price probe wr oa was MARKET PROFILE* COPYRIGHT 1990 CBOT. COPYRIGHT 1990 CQG INC. 1 ue UK HK i) HK HK WK jp FKL A tron scr Il meg ll ts 6 Buying anyTwo Kinds OF Activity At Make Pre Gap The Top OF The Range SOYREANS Novi) ALL RIGHTS RESERVED. 87/06/10 Sr U2 6) yn Sa, 568 WE GH | Ramge i e Be EB Seat F Sea a 56 tr Senay 0 sein m ea ita 5a oe Sense of 562 U2 oe 60 Ue of sa. ar Sel ye DE | patnace 561 U2 of Sal Ue o sel D S60 ut D 560 4 D 0 D 559 4 D 589 10 D 55914 D 59 DStop And Test Yourself Q. What kind of ac A. Compatition. ity Forms extremes? Q Why do you need at least two single ticks to indicate an extreme? A. If the longer-term trader doesn’t move the market at least two ticks, he's not interested. enough to compete. (Q. The greater the number of single prints, the A. More eager the longer-term trader is to compete. Q What kind of activity forms a value a A. Rotations. Q. What is the tonge A. He gives up an edge in order to put the trade on. In other words, he buy: price and sells ata slightly lower price. term trader's known behavior pattern when he trades in the value are a slightly higher Q What is the impact of this behavior pattern? A. It creates a slight imbalance in the value area, Q What reference point do you use to find the imbalance? ‘A. The fairest price in the value area—the price that trades in the most time brackets or, if more than one price trades in the same number of time brackets, the one closest to the mid-point of the entie range. Q.1s the imbatance we ate looking for on the side withthe most activity or withthe lest activity? A. The side with the least activity Q Why does the se with the least activity reflet the longer-term trader? A Because the value area i primarily for raders seeking a fur price. Therefore, the side with ‘he most activity has to reflet the short-term trader who is seeking fait price. No one i gi ing up an edge on the side withthe most activity If the imbatance is above the fairest pric, who is most active, buyer oF seller? A. The buyer because the market moves up to shut off buying If the imbalance is below the first price, who is most active, buyer or seller? ‘A. The seller because the market moves don to shutoff sling, What kind of activity forms range extension? ‘A. When the longer-term trader enters the market with enough volume, he tips the existing balance and extends the range Q. Who is responsible for range extension up, buyer or seller? A. The buyer because the market moves up 10 shut off buying, ‘Q. Who is responsible for range extension down, buyer or seller? ‘A. The seller because the market moves down to shut off selling, Q. If you have both range extension up and selling on the ‘occurred first? igh extrome, which kind of activity ‘A. Range extension up. Range extension up brought in selling. Then competition from the seller formed an extreme at the topInitiating And Responsive Activity Price above XxKK Value Price below Selling Bu abowe = XXX above responsive Value Selling Buying below XX X helow inidating responsive As noted earlier, price can only have three relationships (o value: above it, below it or within it Therefore, if we relate price in today’s session to the previous day's value area, we can classify the longer-term trader's buying or selling in today’s Session as expected ot unexpected. Steidlmayer calls expected behavior “responsive!” He calls unex: pected behavior “initiating? 'W Buying below value is expecteds itis responsive activity Buying above value is unexpected; itis initiating activity Selling above value is expected; itis responsive activity WM Selling below value is unexpected; it is initiating activity Activity within value is a judgment call. You ean cal it either initiating or responsive depending on the context. Generally, unexpected or initiating activity is stronger than expected ‘or responsive activity. Nevertheless, these are general categories. ‘There will be times when initiating activity above or below value is not facilitating trade and that, too, i a piece of information, AAs you work with the data, you'll learn to make nuanced judgments ‘Typically, the more confident the longer-term trader is that the market is under or overvalued, the more likely ie is t0 initiate activity Also, keep in mind that the more active he is, the more imbalanced the market, That's why we'e always focusing on what the longer- term trader is doing ~hecause he's responsible for any imbalance ‘and imbolance creates opportunity ‘The more imbalanced the market, the further it has to yo to reach equilibrium (or (find an opposite response). The further the ‘market has 10 go to reach equilibrium, the better the opportuntty Ee In Part II of the Guide, you'l see how to use this information on activity ina single session to monitor longer-term tends. 4sChicago Board of Trade The following table shows the time bracket Market Profle® Symbols with the ald and the new bracket codes, ole New 1.00 ib -12:3048 ingoaM — 1.004 1.00aM = 1304 La0aM - 2.0088 onan = 2.308 2aDAM - 3.0008 00MM - 3.308 330aM - ¢00AM ‘e00AM = 42040 30am S.004M Sona = 5:30 530AK - 600M 00K - 6:300K 630K - 7.00 O0AM - 7:30; 730AM = 8.00 E.O0AM - 8:30AN 830K. 9:004N 00M - 9:30,N 9.30aK 10-00 aN 10.004M 16:30 lana 11.004 100A 11-308 ULaDAM 12 HOO YP NOON 12:0 inane = 1:00 LOOP - 1:0 PH SOP. 200 PH 2-00PK - 2:30 P 280PH - 3.007 300eM - 3:30PK 3.30PM. 4.00 PK ‘SO0PM . 430PK 430M ~ 5:00 S00 PM - 5:30PM S30PK - 6.00 PH 00 PM. 6:30PM 3PM. 7.00K Top. 7:300m 7.30PM ~ 6.00 PH 8.007K . 6:30PH 2.207K - 9-00 PH | 9.00pm - 9:30PM 9:30PM -10:00PH 10.00 10:30 ioaorM -11-00K Ho0PM 11-30 130 PM 12.000cB oT MARKET PROFILES PART II USING MARKET PROFILE” DATA TO MONITOR LONG-TERM TRENDS @ Chicago Boardof Trade Internet Address hta:/www.cbot.com(Care has been taken inthe preparation ofthis material, but there is no warranty or rcpresentation expressed or implied by the Chicago Board of Trade to the accuracy or completeness ofthe material herein. ‘Your lege counsel should be consulted concerning legal restrictions applicable to your particular situation whiel ‘ght preclude or limit your use ofthe futures market described inthis materia, [Nothing hercin should be construed as a trading recommendation of the Chicago Board of Trade, (0199 Board of Trae of the City of Chicago, ALL RIGHTS RESERVED. Printed jn the USA.PART Il: USING MARKET PROFILE" DATA TO MONITOR LONG-TERM TRENDS CONTEN’ THE LONG-TERM AUCTION CHART The Format The Longer-term Behavior Pattern Constructing The Chart In Summary 50 50 59 63 86so The Format ace THE LONG-TERM AUCTION CHART Part | of this Home Study Guide discusses activity in a single ses- sion. In Part II, we're going to look at activity in longer-term trends. Once again, we're going to focus on the Joager-term tradet because, just as he determines how a single session develops, his willingness to buy or to sell determines how long a major tread lasts Werte going to monitor his activity with the help of the long-term auction chart This longer-term graphic takes daily information on price, value and market aetivity (the activity of the longer-term trader in the tree areas of the range~ extremes, range extension, valle area) and ‘organizes it visually. ‘The price range of the auction isin the center of the chart. ‘To the right of the price range, opposite the appropriate prices, are rectangles representing the range of the daily vafve areas. This is the range in which 70% of the day's trade occurred —in other words, the first standard deviation, (Look at page SI to see how the 70% range is calculated.) The wider the 70% range, the Detter the marker is facilitating trade Why? When market participants feel confident about value, they are willing to trade in a larger area The rectangles representing value move up or down as the market, trends up or down. As long as value is moving vertically, the auc- tion of trend is continuing. In other words, the long-term range is ‘expanding up or down. SteidImayer’s long-ierm format is vertical because price moves verticallyup or down. The rectangles representing value move to the right on!y if the auetion stalls and the market starts to trade sideways. You can see at a glance whether value is moving up or down or if it is moving sideways ‘That takes care of price and value, The other component of a long: term trend is market act70% Range Calculation 10% range ‘Why is market activity on the chart? [1's not on other long-term graphics such as bar charts, for example This chart shows the activity of longer-term buyers and sellers because i 1s their activity thot moves price up, down or sideways. In the broadest terms, if an up trend is going to continue, you need strong activity from the buyer. Conversely, if a down trend is going to continu, you need strong activity from the seller. Sce page 52. Daily information on longer-term buying activity in the three areas of the range is on the right. Daily information on longer-term selling activity in the three areas of the range is on the left. Since we're always discussing the Jonger-rerm buyer and sellers we're just going to use the terms buyer and seller from this point om.) Connoes Tad wom 535 it 108 om 38 Som om Co hx iso am mom ion mk isk io 1 To calculate the 70% range, start with the high volume price. If that volume is 70% or more of the day's total, that's the range W Fics not, check the volume for the two prices above the high volume price and the 1wo prices below it. Take the larger of the ‘wo. Add it to the original volume and continue in this manner until you have 70 of the day’s total volume. W In this example, start with 150 contracts. Then compare the two above with the two below. (80 +90= 170 vs. 70 + 60130.) Take 170 and add it to 150. Continue until you have approximately 388 which is 70% of the day's total volume of 585 contracts 1 The 70%» calculation generally is slightly greater than 70%. ‘Why? We're working with aif the volume at a given price. We ‘would have to use fractions of the volume at each price to come ‘out with exactly 70% st‘There are three columns for initiating activity (extremes, range extension and value area) and three columns for responsive activity {eatremes, range extension and value area) ~six columns for the ‘buyer and six columns for the seller. Were going to represent market activity with boxes on the appro- priate column, (To review briefly, initiating activity is buying above vvalue and selling Below value; responsive activity is selling above and buying befow value.) ‘On the chast below, you can see that on day 1 there is initiating buying in all thece areas of the range. (The boxes are roughly oppo- site the center of the day’s value area.) Again on day 2, there is ini- Tiating buying in all three areas of the range. Then on day 3, along: with initiating buying in the range extension up and in the value area, there is responsive selling om the high extreme. ‘The chart is organized with price and value in the center because price and value form the auction core. Extremes are closest to the core because, in general, extremes form first in a session, any range extension next and the value area las. Initiating activity is also closest to the auction core because itis ‘generally stronger than responsive activity ‘SELLING i 3 2 Range Extension Vahie Area Range Extension Extremes BUYING rig RESPONSIVE | Extremes Range Extension Value AreaHowever, as you work with the data, you will se that initiating activity is not always stronger than responsive activity. For example, ‘say you're at the top of a move and you have initiating buying that is not facilitating trade, Volume is low; the value area is narrow ‘This can he an indication that the move may be coming to an end. In other words, the market may continue to move up but at a decreasing rate, [Now say the market goes a litte higher and brings in strong respon- sive selling. The solid responsive activity (a strong opposite response) could be an indication that the market may be getting, ready t0 reverse ‘Look at the format again and you can see that we have the three basic components of a trend price, value and market activity—on the chart. Now, we'e going to add neutral days and failed range extensions to the left of the price range with an asterisk, Firs, let's define the terms. Neutral days have range extension in both directions~range exten sion up and down because market participants are uncertain. {A Tailed range extension shows that the market tied to extend the range past the initial balance—at either end —and failed. After the failure, the market generally retraces and extends the range on the ‘opposite side because, again, market participants are uncertain. You know what a neutral day looks like because we covered neutral days in Patt L See page 18 in Part 1.) What does « failed range extension look like in the data? It can appear in several ways. Keep in mind, though, that these are ust general guidelines. The issue here is to unclerstand the concept ~ not to focus on the number of ticks WA failed range extension can be one single print (See page 55). WA failed range extension can be two to four single prints—in ther words, an extreme (see page 56). Or a failed range extension can be a double print at the top or ‘What happened in all three cases? ‘The seller fails to bring in mote selling with the altempt at range extension. There is no follow-through. This isthe key—no follow” Uhrough activity after the initial attempe at range extension. Well, that’s what neutral days and failed range extensions Took like in the data, How do you indicate this kind of activity om che chart? Since there is generally no net influence on neutral days, we're just going fo put an asterisk to the left of the price range opposite the dday’s value area. We're not going to indicate activity in other parts ‘of the range with boxes. See page $2. Day 5 is « neutral day We don't indicate activity with boxes because the market is gen- erally balanced on neutral days. As you start to work with the data, however, you'll see that the market sometimes starts out balanced ‘on neutral days and then begins something new in the same session. 53Activity on page 66 is an example of the market coming into, balance with range extension in both directions and then beginning Something new in the same session. Or the market might cest the upside with a range extension, then trade back and begin something. new with a range extension to the downside. As you move forward, you'll see that the critical issue is recognizing whether the market is still balanced and moving sideways on the neutral day...or if it has become imbalanced and is starting to trend, As Jar as the chart is concerned, we're going to indicate all neutral ays just with an asterisk (0 the left of the price range. On the other hand, when we see a falled range extension, we're ing to note the failure with an asterisk and we are going to indi- ‘cate activity in other areas of the range with boxes. Why? Because a failed range extension on the upside is defined by longer-term range ‘extension on the downside or vice versa. See page $5. ‘To understand this concept, think of the traders most in touel with the market: the short-term locals who provide liquidity by making a market. If they are going to stay in business, they have to anticipate ‘market direction. Occasionally, this intuitive sense encourages them 10 do too much too soon. The result: an opportunity that no one wants—in other words, a failed range extension. See page $2. Day 6 has a failed range extension down. ‘The asterisk indicates the failure; the boxes show range extension up and buying in the value area ‘You know the asterisk reflets a failed range extension and not a neutral day because there are boxes reflecting activity for day 6. You also know the failure was to the downside because one of the boxes shows that the buyer successfully extended the range up. Both kinds of activity~neutral days and failed range extensions— show a failure in the session by the longer-term trader. If this acti ity is a failure, why is it on the longer-term chart? Because neutral days and failed range extensions often have longer-term implications The market often uses neutral days to change direction, Failed range extensions often indicate that the market wants t0 go in that direction but is trying to do too much ta0 soon. Nevertheless, since both kinds of activity indicate uncertainty, isn't always going to be clear if you have a neutral day or a failed range extension. So you'll have (0 use judgment. In order to under- stand what's happening, it helps if you ask yourself whether the ‘market is trying to do too much too soon...or if itis testing one ‘more time before changing direction. It doesn’t matter what you put on the chart. The critica issue is to read what the market is telling you correctly: See the example on page $8.Market Profile® Graphic MARKET PROFILE Comynight Chicago Board of Tade 1988 610 2 balance | pEFGHY The failure on the downside is defined by range extension on the upside. Generally, after a failed tange extension, you'll have range exten sion in the opposite dizection but not always. Once again, the issue is whether the market is trying too much too soon —not ‘whether this is technically a failed range extension, 55Market Failu nial balance = ' : ! t Init foe fel) 7 Ks ie Ha a im on om i i a down 1 The soybean market is trading opposite the initial balance. Then in V period, the seller tries to extend the range down. He extends it thmee ticks but the range extension fails because the buyer comes in right awa Then the market trades all the way back ancl the buyer extends the range up in X period. The range extension continues in the a period.‘Market Failure MARKET PROFILE* SOYBEANS: Trade Price seo 514 314 sin S19 4 519 sre sre sre sme 144 sin sm 7 S763 a6 ut S16 m6 S153 asin S15 uM 55 5143 sin si sm saa sin saa sn sms Initial balance Market Posie" Graphic Copyright Chieago Board of Tae 195 May G1)" ALL RIGHTS RESERVED. 91/03/22 Halt Hour Brocet Times x Tk 4h Ike 1k Tbe Joke Joke Tobe Yoke Tobe x Ne x uw wwe TUN uw uW WW ww ww Tow Tw uw ww Ww w TW balled range W— extension s758 Market Failure MARKET PROFILE® US. BONDS rode Price a sian 303 ma 297 8 2037 an 261 ain ma 74/32 anim ane wna ae 70 ae 1982 19a ae vis an 602 te 52 a ae 81382 8 1282 wa in2 a0 H 9a 8 om a8 7132 632 5182 Initial balance Market Profile” Graphic Copytiht Chicago Board of Tade 1990. Dee (9) ALU RIGHTS RESERVED. 90/10/11 Holl Houe Bracke Times S| Failed range S| extension i or neutral day? asiy OF mente omSIW cmstuws PORSTUW OPORTUNYs Prue DrTuvws puma uve Wa ve a ob TRE EEEEER TOS! Is the S period extension one last test of the upside or does the market want 19 g0 in that direction? In other words, is this a neutral day or a failed range extension on the upside? It's impos: sible to tell just by looking at the data Ask yourself: Where are you in the move? What are the current conditions that affect value? Why isthe longer-term (rader ‘uncertain? T questions will help you focus on the context in which the activity is occurring.The Longer-term Behavior Pattern Now that we have a format, what are we going to look for on the char’? We examined daily activity in erms of imbalance and balance and we are going to use the same behavior pattern to ‘monitor long-term trends Specifically, the behavior pattern is 1) imbatance, 2) balance, 3) test ‘and 4) imbralance in the same direction or imbatance in a new direc tion, You'll see this patcern clearly as we constract a long-term auc tion chart Before we begin, though, le’s look for this pattern on page $2. Days 1 and 2 are fmbolanced. Value is moving vertically. Buying is the dominant activity. Boxes representing activity are only on the buy side of the chart. ‘Then, on day 3 the market is high enough to bring in an opposite response. Responsive selling on the high extreme is an indication that the market may he starting to come into balance. ‘On day 4, the market is moving sideways. The market has moved from imbalance to balance—from a situation where boxes were on ‘one side to one where they are on both sides. Day 5 is a neutral day. The market is balanced. It seems to be testing the strength oF the up move, On day 6, value is still unchanged but there isa failed range exten- sion to the downside, This could he aa early indication that the ‘market wants to go in that direction, The market seems to be con- finuing to test. Ifthe seller gains confidence, however, this might be the end of the up move and the beginning of a down move. In other words, the market could hecome imbalanced in a new direction. One more point hefore we start constructing the chart The behavior pattern discussed above is a constant. However, when ‘the market comes into Dalance...how long it tests...and whether it becomes imbalanced again in the same direction or in a new direc tion depend on a variable the perception of value. ‘Therefore in rea life we wouldn't be reading this chart in a vacuum, Swe would be constantly evaluating activity in relation to the conditions that affect value, We're going to add the perception of value to our analysis in Part IIL. For now, we're just going to focus on leaening to identity the ‘market's imbalance-balance behavior pattern with the help of che long-term auction chart Before we start constructing the chart, however, stop and test, ‘yourself on the material we've eovered so far. The testis on page 60. »0 Stop And Test Yourself Q. What are the components of 1 long-term trend? A. Priee, value and market activity. Q, Why is market activity on the long-term chart? A. Because itis market activity (activity of the longer-term trader in the three areas of the range) that moves price up, down or sideways. Q. Why is activity on the chart organized with extremes closest to on next and activity in the value area ‘A. In general, extremes form first in a session, range extension next and the value area last Q. Why are neutral days and failed range extensions on the long- {erm chart? ‘A. Even though this kind of activity isa failure in the session, it Often has longer-term implications Q What do neutral days and failed range extensions indicate? A, Uncertainty . Is it always going to be easy to determine if you're dealing with a neutral day or with a failed range extension? A. No, because both kinds of activity indicate some une about longer-term value, ‘Q. What can you ask yourself (o make the decision less difficult? A. Is this activity one last test of the upside or downside before reversing...or does the market want to go higher or lower but is Laying to do too much toa soon? Tt helps to relate these questions to the current perception of value. ‘Q. What behavior pattern are we looking for in the chart? A. Imbalance, balance, test, imbalance in the same direction or imbalance in a new direction, Q. Is this pattern a constant? A. Yes, the behavior pattern is a constant but the length of time any part of the pattern lasis depends on a variable. (Q. What is the variable? A. The perception of valueaConstructing The Chart We're using data from the bond futures market from 8/29/86 to 9/12/86 to construct our chart. Use the blank form on page 62, There is a completed long-term chart on page 89 against which you san check your work. As noted in the introduction, we're using data from 1986 hecause these sessions are especially illustrative of the market's imbalance balance behavior pattern ‘To set the scene: this isthe end of August 1986. We're at the top of fan up move. At the beginning of the month, the market was trading at 95-15. On 8/28/86, value was 101-08 to 100-16. The long-term unfair high parameter was established in April 1986 atthe 105-00 level and we're approaching it again. As noted earlier, these parameters are reference points because they can contain the range. The market either trades through the parameter or reverses. With that in mind, let's look at activity on 8/29/86. The text is on page 64; the data is on page 68. 638/29/86 Where did the market open in relation 10 the previous day’s value area and then what happened? The market opens above value at 101-30 to 102 and moves down, creating a selling extreme at the top. The buyer comes in at 101-14 and the market trades up and tests the upside in C and D periods. It can't trade up and gradually rotates down in E, F and G periods Then what happens in H? To H period, the seller extends the range down, Since there is no follow-through activity, would you say this is « failed range extension? Remember, we're at the top of the move Does the market seem to want to reverse? In other words, isthe market trying to do too much too soon? There is no follow-through activity because the buyer enters the market and his competition forms an extreme at the low. Then the market rotates between the high A period extreme and the low H period extreme—developing value for the rest of the session Furst, put the price range on the chart, Start with 102-00 at the cop and Come down by twos (102, 101-20, 101-28, ete). Next, put the day's value area (70% range) on the chart opposite the appropriate prices, 101-22 10 102. Note the volume in the column on the right. You can use total volume for all contracts traded or volume for the specific contract you are trading. Just be consistent so that you can see whether the volume is increasing or decteasing. We're looking at volume because a move that brings in increasing volume generally has to g0 higher or lower to shut off the activity. What is the net activity in the session extremes, range extension, value area? Initiating or responsive? Responsive selling above the previous day's value on the high, extreme, initiating buying above the previous day's value on the low extreme, failed range extension down, initiating buying above the previous day's value in today’s value area. Let's put that activity om the chart. What is your conclusion? Were approaching a parameter. What kind of activity from the buyer do we need to trade above the high parameter? Are we get- ting it? Is the initiating buying facilitating trade? Simply put, facilitating trade means that as the price moves up, tite move brings in more buying or asthe price moves down, the move brings in more selling, Is the up move here bringing in substantial volume?8/29/86 70% range of daily volume Chicago Hoard of ade Liguiiy Duta Bank” Repor ht Chicago Hoard of Trade 1986. ALL RIGHTS RESERVED. i Summar Repo fo 0829/6 tt 11 2932 A * * (ae Failed range extension down : 1 alae area ‘Total Volume for US. Bonds 292,38 $4.7 18 Not only is the volume low but there is also a selling extreme at the top. If We're going to trade through the parameter, we need strong activity from the buyer and the buyer doesn't enter the market until late in the session—H period, This is an example of initiating activity not facilitating trade. ‘Also, a failed range extension js often an early indication that the ‘market wants co go in that direction Where do you think we are in the behavior pattern? It seems as though the market is coming into balance and testing the high of the move. The up auction may be coming to an end.9/02/86 70% range of daily volume (Chicago Board of Teede guidcy Data Bank” Report, Copyright Chicago Board of Trade 1986, ALL RIGHTS RESERVED. Nolume Sammars Report for 09/02/86 US Bonde Dec fe Note! Volume figures shawe ate actual numbers hile by 2 ede Pee ht Mo Bc Tes rr) C tat t tina ie ‘to ot . LAH Range extension up Neutral day Range extension down Tima fe Value area Bot ‘Total Volume of To y cm cre You! Vohime for Dee 36 US Bonds 238,400 43 LE Tal vowme for US Bonde meio 2819/02/86 Where did the market open in relation fo the previous day's value ‘and then what happened? ‘The market opens below value at 10/14 to 101-07 and trades down initially. The seller extends the range down in C period. There is no follow-through activity because the buyer enters and his competi- tion forms an extreme at the low. The market then trades up and tests the upside. ‘The buyer extends the range up 10 101-20 in E period. This is just below the bottom of the previous day's value area, You've probably noticed how the market bounces off the tops and bottoms of value areas. The tops and bottoms are ending distribu tions that can contain the range (in other words, stop a move). The value area isthe first standard deviation. In a larger saraple size, the top or the bottom of the value area is the end of the fist standard eviation and the beginning of the second. Back to our example, the up move stops just below the parameter, ‘What are the only two things that can happen here? The market can trade through or reverse. What happened in this session? ‘The market can't seem to facilitate trade at the top. The seller enters at 101-20 and his competition forms an extreme. |What's happening in the market now? It is gradually trading lower. ‘The market rotates down in G, H and I periods. Value seems to be shifting from the middle of the range down fo the unfait low, In ‘other words, the market seems to be shifting from balance to imbalance, ‘The balanced distribution started to come to an end in H period and the market started to shift to imbalance in I. Relating this activity to the longer-term move, the market tested the upside again and failed to trade through the parameter. The buyers ddor't seem to have gained confidence as far as the long-term move. is concerned, ‘What do you think about putting on & short position here? In K period, the market takes out the low parameter (the C period extreme) and trades down to 99-23 in L period. Pur value area on chart, Note the volume. What is the net activity in the session? Range extension jn both directions. What kind of day do we have? ‘Neutral day. Let's note the neutral day with an asterisk. What is your conclusion? ‘The up auction seems to be ending and a down auction beginning. ‘We are at a Jong-term unfair high (long-term parameter). The ‘market tested at the top of the move and couldn't trade up. oActivity was relatively easy to read in this session ecanse the market not only tested the upside but also began the new move ‘down in K period. This session is clear example of the market changing dizection on a neutral da. In this situation, the market had come inta balance at the top of the move. And itis alway’ important to keep in mind that @ bal- ‘anced market isin position for a directional move. ‘The market comes into balance because market participants are uncertain. They're taking stock before they moxe directionally again. That's why « balanced market gives you time lo make & decision, Of course, the balance period can be extremely brief, And the shift from balance to imbalance (or vice versa) is naturally going to ‘occur more Frequently in active markets than it will jm slow ones. fa this session, however, note the amount of time the marke! took to shift from Balance to imbalance. ‘The market tested the upside in E period and then gradually shifted down in F, G, H, [, J. You had two and one-half hours while value moved down from the middle of che range (o the unfair low The ‘market began to tip in K period and then became stronely balanced in L. Also, when you're at a parameter, you want to be aware of potential liquidation. Keep in mind that as soon as traders put on a position, they start looking for « place to offset. Broadly speaking, if the market moves against them, they are likely to offset and this activity can start a ‘market reversal. In this situation, we were at the top of the move and market participants were long Finally, it 8 eriticat 10 recognize that the market is not always going {to test exactly as it did in this session. Nevertheless, if you know the ‘behavior pattern you're working with~ imbalance, balance, test, imbalance in the sane direction or imbalance in a new direction ~ oul have a constant framework to anchor your judgments, ‘That's why its 50 important to understand the basie principles and not just to memorize rules. When you grasp the concept, you can take it into any situation and recognize what is happening particular time,NOTES» 9/03/86 Where did the market open in relation to the previous day's value ‘rea and then what happened? ‘The market opened almost two points lower at 98-21 10 98-24. It initially tested the top and then moved down directionally. It found ‘an opposite response at 98-08 in B period and then traded back up in C and D periods. ‘The market started to rotate down in E period. In F period, the seller tipped the intial balance and extended the range, He extended it again in H period down to 97-13, What happened then? The directional move took the market low enough to bring in stronger buying. The buyer's competition created a five tick single print extreme that stopped the move and the market traded back up. ut value arca on chart, Note the volume. What was the net activity inthe day extremes, range extension value area? Initiating or responsive? No extreme at the top Gust one single tick), responsive buying below the previous day's value on the low extreme, initiating range extension down below the previous day’s value, initiating selling below the previous day’s value in today’s value area, Ler’s put that on the chart What is your conclusion? Do you think this is just a pause in the down move? Or do you think the market is going to reverse? We've moved down far enough to bring in an opposite response Buying and selling are both present. So it appears that we've moved From 1) imbalance to 2) balance, ‘There is substantial range extension down. The range extension is about double the initial balance. So even though it extended low enough to bring in strong buying, the seller still seems to be actively interested, Were going to discuss Liguidity Data Bank volume in Part VI of this Home Study Guide. I want to point out here, however, that by looking at the percent of total column opposite the H period ‘extreme, you ean see how fast the market moved out of the area. (The percent of total column shows the percent of the day's tozal volume at each price. The lower the volume, the faster the market is moving.) What do you want to do about your position? ‘Well have to monitor activity, of course. But it wouldnt be unreasonable to anticipate that the market will probably test lomorrow~in other words, step three in the behavior pattern,9/03/86 70% range of daily volume (Chicago Board of Tade Liquidity Data Bank* Repore Copyright Chicago Board of Trade 1986, ALL RIGHTS RESERVED. Volume Summary Report for 09/0386 US. Bonde Decte Note: Volume figures shown are actual numbers muhipied by 2. Thode ce Total Holl Hou Bracat Tes 985007 Wook 2 a a a a $9 2900 1 902002 2 mnt 2 ut 1 987500 2 0 4n0 1 387302 a 98 7202 i 8210 2 987062 4 1902 i 99 1952 1 981760 58 1602 1 8 1902 1 a2 4 nya i 98 1262 0 sonia 1 90 1052 a %8 902 2 om a 5 eae 1 a a 1 oe Si I I 1 I t 1 4X 4 i 1 1 1 1 1 t 0 0 0 0 1 0 H H 0 a 93 TPOs mam nan 98 200 3B ae a ara ram am sr 7087 um 517887 one sr nn nm sr2vn sr 70 aria 57 late sie 5718 Low sr isin 71a sr rae % Dy vats Value area 444 — Initiating selling fk in value urea rook UK FoHUK rok ‘ow MY 67 1POs aH za a Al al a 4 4 4 4 pani Responsive buying low extrome cerount, Total Volume 49 of Tota i ci cr ‘Taal Volume for Dec 86 US. Bonds 457,474 55,0 12.5 ‘Total Volume for US. Bonds 508,740 S45 126 19/04/86 Where did the market open in refation to the previous day's value ‘and then what happened? ‘The market opens at 98-14 {0 98-17—in the previous day's value— and then trades up in B period. Tt can't trade above 98-26 and trades down in C period. In D petiod, the seller tips the initial balance and extends the range down. The range extension stops in F period at 97-17 but there is no ‘competition from the buyer to form an extreme, The market rotates back up in G, H, Land J and then down in K and L. periods. Put value area on the chart. Note the volume. What isthe net activity in the session extremes, range extension value area? Initiating or responsive? No extreme at the top (no single prints), no extreme at the bottom Gust one single print, initiating range extension down mostly below the previous day’s value, initiating selling within the previous day's, value in today’s value area, (Activity within value is a judgment call, You can classify it as either responsive or initiating. Calling it responsive because \weak or calling it initiating and noting that the activity is not facilitating trade gives you the same information on market activity. ‘To simplify this exercise, we're going to call all activity within value initiating. In addition, if sctivity is below and within value or above and within value, we're going to cal it initiating.) Getting back to our example, les put the activity on the chart. What is your conclusion? Wes the buyer strong enough to do ‘anything 10 the market in the session? ‘There is no net buying, Selling activity and volume seem to indicate that the market is stil imbalanced to downside. It appears that the market has to move lower to bring in the last seller (i, shut off selling activity) and to bring in buying strong enough to stop the down move, Therefore, it appears that the down move is continuing — but perhaps at a decreasing rave,9/04/86 Pr value area 70% range of daily volume Chiao Road of Trade Liguaiy Dara Baak” Repoet Copyright Chicago Board of Tade 1986, ALL RIGHTS RESERVED, Volume Summary Report for 0/08/84 US Bone Date Note: Yohume figures show ave actual nombers mulled by 2. Thode Price Half Hour Brocket Times 98 mtr , —— No indication on high extreme 98 252 q 98 1482 KK 98 7307 Bux 98 m2 8K ene bux sa 203 AO 98 907 MOK se 18 Anco swat ADK 108 TPOs anOK AnDiK nou anu BDH oH aoaU pa Pore Initiating selling rene in value area ‘eH Range extension down DeFHIKL initiating selling Dern cra NL aria 97 3082 sr 9a 57 m2 ora 57 a ane 57 Mat sr armen 97 ng sr me sr i932 sr aa orn % ‘e 98 1022 Value area tat eit tat at 59 TPOs Total Volume % of Total v em cre Total Volume for Dec 86 US. Bonds 430,646 $6.1 13.4 Total Volume for US. Bonds amg. 38.9 13.7 B" 9/05/86 Where did the market open in relation to the previous day's value ‘and then whet happened? ‘The market opened below value at 97-08 to 97:10. It moved up initially to 97-14 and then moved down directionally in A period. ‘How do we know? Competition from the seller at 97-14 formed 3 single print exiceme at the top. The seller seems to have gained con- fidence again. He moved the market over one point in the first half hour. ‘Then what happened? ‘The directional move brought in an opposite response at 96-04, Competition from the buyer formed a single print extreme at the Tow Then the market rotated between these two excesses, developing value for the rest of the session. ‘The buyer tested the upside in G period but couldn't take out the selling extreme. Remember, once you put on a position, you're looking for a place to get out, Did you offset in this session? Put value area on the chart, Note the volume. What is the net activity in the session extremes, range extension, value area? Initiating or responsive? Initiating selling below the previous day's value on the high extreme, responsive buying below the previous day’s value on the low extreme, no range extension (the entire range was established in the {rst half hour), responsive buying below the previous day’s value in today’s value area. Lets put that on the chart Wher is your conclusion? ‘The market seems to have moved from imbalance to balance again. Do you think we've moved low enough this time to bring in an ‘opposite response that is strong enough to stop the move and reverse market direction?9/05/86 Chicago Board of teak Ligaidiyy Dats Hanke Repost Cnyngbt lyase hod of ate 196, ALL RIGHTS RESTRVED, beste Trode Price Hall Hour Bracket Times sr uns 4 aria 4 ar A srt 4 srs 1 | tnidiating selling high exte 913i A 37 9g ra a7 1 A 7 632 A 7 san A a7 4m 6 oy 3m 4“ a7 a a 7 ve 6 oI rs goaua cH 963018 sch se 98 sca 96 82 cK 7H TPOs 56.0132 AKL 94 162 ‘er 565132 AeA 96 1132 AEH 56 1382 Ana, sen AEA 56 218 Hesse — Responsive buying in 96 2092 BCR valve area 9619832 ABOEHIL 961032 ABELL 96 182 an 94 1682 amo 9-1POs 96 1532 mao, 89 POS 6 1432 ABEL 61382 aBEOLL 6 a8 aco 96 1132 ou 602 a 56 9132 a 56 a a 6 1132 a 96 on a 96 5132 4 | Responsive buying low extreme 96 482 a yor» range [46 1292 of daily r volume — | 9628/32 "Value area Total Volume fy of Total cm criz ‘Total Volume for Dec 86 US. Bonds 340,784 520 15.6 ‘Total Volume for US. Bonds 375598 SLO 18d 16 9/08/86 Where did the market open in relation 10 the previous day's value area and then what happened? ‘The market opens almost a point below value and the buyer enters right away ia A period. The buyer's competition forms a single print extreme in A period and the market trades up into value in B period. ‘The buyer executes enough volume in E to tip the initial balance and extend the range up. But the range extension stops at 96-21 when the seller enters. His competition forms a single print extreme at the top. ‘Then the market rotates buck and develops value in F, G, H and 1 periods. The buyer manages to extend the range up another tick in J and one more tick in K, But he can't seem co facilitate trade at the top. In addition, he doesn't seem to be confident enough to hold Ihecause the market rotates down in L period and takes out part of | the buying extreme, ‘Therefore, even though conteol seems to have shifted from seller to buyer in the near-term, do you think this isthe end of the long- term down move? Did you offset in this session? Put value area on the chart, Note the volume, What is the net activity in the session extremes, range extension, value area? Initiating or responsive? (As noved earlier, we're going to call activity within value initiating, ‘You can see, however, that the range extension here is not very strong—only eight ticks. Consequently, if you call the range exten- sion initiating but note that itis not facilitating (rade...or if you call it responsive because i's weak, you're getting the same informa tion on market activity) Responsive buying below the previous day's value on the low ‘extreme, initiating cange extension up within the previous day's value, initiating buying in today’s value area below and within the previous day’s value area. Because of our comention, we're calling the value area activity initiating, You might just as easly calli responsive, however, ‘Let's put that activity on the chart. What is your conclusion? In spite of buying in all three areas of the range, the buying doesnt seem very strong. The volume is lower than the day before and the range extension stopped a 96-23. Relating this activity to the long-term move, this could be a near- term correction, We'll continue to monitor to see if the market con- firms or rejects our bias.