BEYOND THE RULES

USING MARKET LOGIC TECHNIQUES WITH THE MARKET PROFll.. E *

ADVANCED COURSE

Short Tezm Applications

Dalton Capital Management, Inc., 37 2 West Ontario Street, Suite 301, Chicago,
n. 60 610

(800) 23 2-9 688 or (312) 988 -9 688

* Registered trademark of the Chicago Board of Trade.

 TABLE OF CONTENTS

PART 1: INTRODUCTION: THE LEARNING PROC ESS " THE S EARCH FOR
INFORMATION 1

L THE LEARNING PROCESS 1

A. Student 1
B. Observer 1
C. Advanced Beginne r 2
D. Decision-Maker 2
E. Expe rt Trader 2

ll. THE S EARCH FOR INFORMATION 3

A. Fundamental Infonnation 3
B. Technical Infonnation 4
C. Market-Genera ted Infonna tion 5
D. Market-Generated vs. Technical Approaches 5

PART 2: THE MARKETPLACE " THE TRADE FACILITATION PROCESS 6

I. OR�TION OF THE MARKETPLACE 7

A. Revolves Around a Product 7

B. Common Participants 7
C. Behavioral Characteristics of Producers and Consumers 7
D. Behavioral Characteristics of Middlemen and Scalpers 8
E. The Need For Information 8
F. The Need To Promote Trade 8

ll. THE TRADE FAC�ATION PROCESS 9

A. Continuous Creation of Activity 9

B. Evaluating Longer Tenn Trade Facilitation 9
1. Volume 9
2 . Value Area 9
3 . Value Area Placement 10
4. Attempted Direction 10
5 . Old Busine s s vs. New Busines s 11
6 . Other Structural Signs 12
7. Dominant Activity 12
8 . Trade Facilitation Relationships 13
9. ReCOrding Longer Timeframe Infonnation 21
 C. Market Activity 24
1. Exces s 24
2 . Timeframes 26
3 . The Auction 27
4 . Price 27
5 . Time 28
6 . Price vs. Time 28
7 . Behavior 29
8 . Auction Duration 30

m. THE CONFLUENCE OF STRUCTURE, TIME AND LOGIC 32

A. Market Structure 32
B. Time 33
C. Market Logic 34

IV. DAY TRADING THE S & P 5 0 0 WITH THE MARKET PROFll.E * 37

A. Using Premium Levels With the Market Profile * Graphic 37

B. The Golden Rule o f S & P Trading 37
C. The Anticipatory Nature o f the Premium 37
D. S & P Spread Fundamentals 38
E. Calculating "Fair Value" 39
F. Types of Buy and Sell Programs 39
G. Four Stages of S & P Premium/Program Behavior 41
H. Trading Applications 43
1. Two Forms o f Risk 43
2 . An Example 43
3 . Expanded Commentary 45
4. "Trading the Premium" On Balanced Days 50
5. Longer Timeframe Applications 51

V. CORRECTIVE ACTION 53

A. Unlocking Thinking and Behavior 53

B. Definition 53
C. General Perceptions o f a Correction 53
D. Other Forms o f Correction 54
E. The Function o f Corrective Action 54
F. Example 55

VI. COMBINING THE MARKET PROFll.E * WITH TECHNICAL ANALYSIS 57

A. Market Profile * /Technical Combination I 58

B. Market Profile * /Technical Combination n 62
PART 3: ANALY'ZING, IDEN'!UYlNG &: IMPLEMENTING DAY &: SWING TRADES 63

I. THE BIG PICTURE 63

A. Properly Analyzing The Longer Term Auction 63

B. Placing and Weighting Trades 63
C. ongoing Analysis of a Developing Market 64
D. Balanced Trading Areas 71
E. Trade Location 74

II. HOW DAY �EFRAME STRUCTURE FORMS &: HOW TO VISUALJZE IT 75

A. Structural Information 75
B. Dispersion of Volume 76
C. Late-In-The-Day Price Trends (Spikes) 77
1. Definition 77
2 . Trend Review 77
3 . The Logic o f Spikes 77
4 . Potential Openings Following a Spike 78
5 . Spikes As Support or Resistance 79
6 . Expected Trading Range 79
D. Openings 80
1. Four Types 80
2. Exceptions To Opens 83
3. Exception To The Exception 87
E . TPO's 88
1. TPO Theory 88
2 . Value Area Mechanics 88
3 . TPO's In a Developing Market Profile * 90
4 . TPO's In a Two-timeframe Market 91
5 . TPO's In a Trending Market 92
6 . TPO's In a Changing Market 93
F. Rotational Logic - The RF Factor 94

m. DOING THE TRADE 96

A. Philos ophy 96
B. Homework 96
C. Trade s You Would Like to Do 98
D. Entering the Trade 99
1. The Risk/Opportunity Scale 10 0
2. Strategies 10 0
a. Open-Drive Strategy 101
b. Open-Te st-Drive Strategy 10 4
c. Open-Rejection-Reverse 10 5
d. Open-Auction 10 7
IV. MONITORING LONGER TERM TRADES FOR CONTINUATION 10 8

A. Throw Away Exces s Baggage 10 8

B. Visualize 10 8
C. Do Your Homework 10 8
 IN"DEX OF FIGURES

Figure 1. Trade facilitation relationships.

Figure 1a. Direction up, higher volume, higher value.
Figure lb. Direction up, lower volume, higher value.
Figure 1c. Direction up, lower volume, OL lower value.
Figure 1d. Direction down, higher volume, lower value.
Figure 1e. Direction down, lower volume, OL lower value.
Figure 1£. Direction down, lower volume, higher value.
Figure 2 . The long tenn activity record.
Figure 3 . The Dalton LTA.
Figure 4 . Day time frame exces s .
Figure 5 . Swing and longer time frame exces s.
Figure 6 . Two-timeframe turned one-timeframe market.
Figure 7. Anatomy of a Market Profile * .
Figure 8 . Swing auctions bounded by exces s .
Figure 9 . Longer term auctions bounded by a bracket.
Figure 10. The confluence of s tructure, time and logiC.
Figure 11. Premium Trading: December S & P 5 0 0, September 9 , 19 8 8
Figure 12. Premium Trading: December S & P 5 0 0, September 9 , 19 8 8
Figure 13. Premium Trading: December S & P 5 0 0, September 9 , 19 8 8
Figure 14. Premium Trading: December S & P 5 0 0 , September 9 , 19 8 8
Figure 15. Corrective Action: December treasury bonds .
Figure 16 . MP/Technical Combination: S & P 5 0 0, May 31 - June 21, 19 8 8 .
Figure 17 . Market Profile * /Technical Combination I;
Daily bar, 3 - 5 day moving average and Market Profile * .
Figure 1 8 . Market Profile */Technical Combination I;
Daily bar, 3 - 5 day moving average and Market Profile * .
Figure 19 . Market Profile * /Technical Combination IT;
Rejection of a break-out, Market Profile * & daily bar.
Figure 2 0 . Ongoing analysis of a developing market, Phas e 1.
Figure 21. Ongoing analysis of a developing market, Phase 2 .
Figure 2 2 . Ongoing analysis of a developing market, Pha se 3 .
Figure 2 3. Ongoing analysis o f a developing market, Phase 4 .
Figure 2 4 . Ongoing analysis of a developing market, Phase 5 .
Figure 2 5. Ongoing analysis of a developing market, Pha se 6 .
Figure 2 6 . Ongoing analysis o f a developing market, Phas e 7.
Figure 27. A market coming into balance.
Figure 2 8 . A market breaking-out of balance.
Figure 2 9 . Dispersion of volume calculation.
Figure 3 0 . Three potential opens on a day following a spike.
Figure 31. The 4 types of opens.
Figure 3 2 . Exceptions to opens.
Figure 3 3 . Short covering rally.
Figure 3 4 . How to trade short covering.
Figure 3 5 . The Texas formation.
Figure 3 6 . The exception to the exception.
Figure 3 7 . TPO calculation.
Figure 3 8 . TPO's in a developing Market Profile * .
Figure 3 9 . TPO's in a two-timeframe market.
Figure 4 O. TPO's in a trending market.
Figure 41. TPO's in a changing market.
Figure 4 2. The RF Factor.
Figure 4 3. RF factor illu strated.
Figure 4 4 . Market-created opportunities .
Figure 4 5 . Market-created opportunities .
Figure 4 6 . Risk/Opportunity Scale.
The CBOT Market Profile * is a registered trademark of The Chicago Board of
Trade, which holds an exclusive copyright to the Market Profile * graphics.
Graphics reproduced herein under permis sion of The Chicago Board of Trade.

The views expres s ed in this publication and in this seminar are solely those
of the author and are not to be construed as the views of The Chicago
Board of Trade nor is The Chicago Board of Trade in any way responsillle for
the contents hereof.
Information contained in this seminar and workbook is gathered from sources
believed to be reliable and accurate. While much care has been taken in
preparation, Dalton Capital Management, Inc. makes no guarantees and assumes
no liability for profit or los s due to the use of this information.
 �CKNOWLEDGEMENTS

We would like to thank the organizations which, either directly or indirectly,

have s o generously provided the historical and real-tUne market-generated
infonnation that is vital to the presentation of this course. Listed
alphabetically, they are:

CISCO via EXPRES S .

Commodity Communications Corporation via FutureSource.

Commodity Quote Graphics via System One.

WINdoTRAD�· via the Dalton LTA.

We would also like to extend a specUli thank you to Pete Stelillm ayer, for
showing us all the way and then letting us grow on our own.
 1

BEYOND THE RULES

P.A.R.T 1

INTRODUCTION

THE LEARNING PROC ESS AND THE S EARCH FOR INFORMATION

Trading decisions involve the blending of fact gathering and analysis

performed by one side of our brain, with the intuition (gained from
experience) of the opposite side of the brain.

L THE LEARNING PROC ESS

A. Student

Introduction to concept and rules from a derivative source, i.e.

cla s s room, books , etc. You are detached. A rule is a rule.
Each rule is equaL No insight as to the overall general
conditions of the market.

B. Observer

You attempt to apply these concepts and rules to real trading

situations. This stage involves a different type of learning.
Rather than the derivative learning of stage one, our learning is
now as a result of our own observations . We begin to observe that
the usefulne s s of the rules varies according to other elements
present in the commodity being traded as well as the overall
futures market.
Most traders give up at this point and revert back to some type
of mechanical system that does not require a co�ation of
analytic and pers onal observation. The trader who departs
at this stage accepts no responsibility for any failure, he wa s
Simply following the rules and they did not work. There was never
any real involvement on the part of the trader.
 2

c. �vanced Observer

At this point, the detennined trader has probably gained additional

derivative information as a result of advanced lectures, reading,
etc., a s well as more insightful observation as to the function of
individual commodities and the overall marketplace. Within this
context the trader is probably becomdng overwhelmed and frustrated.
The succes sful trader is able to cope by becomdng involved in
the decision-making. He accepts an attitude or approach that
ranks the rules as well as his own observations in a decision­
making procedure. This is the first stage at which a blending of
the analytic and intuitive sides of the brain is beginning to
occur.

D. Deci.sion-Kaker

In this stage the commodity being traded is no longer viewed as

just a separate commOdity but as a part of the overall futures
marketplace. There is an understanding that each commodity acts on
its own, as well a s is acted upon by other commodities and markets.
At this stage the trader is involved with the market, taking
credit as well as accepting blame for individual trades. S alient
information just seems to "jump out" at you, while unimportant
information is pushed back out of the way. The decision-making is
done cons ciously. The decision-making at this level is far more
complex than mechanically applying the rules .

E. Expe rt Trader

At this stage both sides of the brain are blended and acting in
harmony. The decision-making is beyond the conscious state.
Trades are simply "done." Very few traders ever reach this stage.
 3

n. THE SEARCH FOR INFORMATION

There is a continual s earch for information that will allow us to beat the
market. Three acknowledged sources are fundamental, technical and market­
generated. Most market participants attempt to combine all three in their
effort to beat the market. In reality, most serious , well-intentioned
traders suffer from information overload and too many conflicting opllU ons .

A. Fundamental Information

L Lags the market.

a. Anticipatory

b. Minute hand vs. the hour hand

2. Is late when it is announced.

Le. June trade figures announced in August

3 . Deliberately misleading.

Le. Political neces sity

4. Subject to interpretation.

a. Relative to where we are in the cycle

b. Timeframe
 4

B. Technical Infoz:mation

1. Much technical information is very logical and ba sed on

observation.

a. Gaps.

b. Consolidation Areas.

c. Trading Ranges.

2 . Fails to differentiate between price and value.

3. Fails to differentiate between old busine s s and new business .

4. Fails to determine if it is the buyer or the seller that is

responsible for a certain price.

5. Fails to measure amount of trade facilitation.

a. Was new price made on increasing or decreasing volume ?

b. Which way wa s the market trying to go when price wa s

established?
 5

c. Market-Generated Information

1. Only place to get an objective opinion.

2. Combines price and volume.

3 . Mea sures the amount of trade facilitation by each participant.

4 . Represents a composite of all available information.

D. Market-Generated VB. Technical Appro aches

A Complimentary Combination.

When first introduced to the Market Profile * , I felt that I had to

be a purist and disregard all the past approaches I had learned.
As I have studied, traded and reflected on the Market Profile * and
market logic, I have begun to recognize that while there is a
considerable amount of invalid information, many of the cla s sical
technical tools and concepts can be greatly ampDlled through the
use of the Market Profile * .
For example, the Market Profile * , when used in conjunction with
an RSI or sbruUar type of oscillator can greatly improve entry and
exit points. Likewise, the Market Profile * helps implement timing
decisions with moving averages and break-outs. Additionally, the
profile can quickly help recognize break-outs and technical
patterns that are likely to fail. Market logic helps traders
unders tand why trend following systems may fail as much as 7 5
percent of the time.

"OUr goal is to present to you a conplementazy market-generated/

technical coJlbinatiDn."

Before demonstrating this combination it is first nece s sary to

review the trade facilitation process and to introduce some new
tools that we have developed, as well as some terms new to the
market logic literature.
 6

BEYOND THE RULES

PART 2

THE HARKETPLACE AND THE TRADE FAClLITATION PROCESS

The ultimate objective of this course is to exandne and develop a logical

proces s for analyzing, identifying and implementing day and s wmg trade s. As
traders experience all too often, it is easy to become so involved with the
smaller nuances of the trading proces s that we lose sight of the market's
overall purpo se --facjJjtation of trade. To be a succes sful day and swmg
trader, we need to understand trade facilitation in all timefrarne s.
Experienced traders mow that not all opportunities are equal, and
cons equently, a s olid money management plan requires varying position size
based on one's perception of risk and opportunity. Without a clear
unders tanding of where you are in the overall trade facilitation proces s,
this is a difficult asse s sment to make.
 7

L ORGANIZATION OF THE MARKETPLACE

A. Revolves Around a Product or Service

B. Common Participants

1. Producers (long tenn seller).

2. Middlemen ( scalpers and floor traders ).

3. Consumers (long tenn buyers).

C. Behavioral Characteristics of Producers and Consumers

1. Long tenn oriented.

2. Act voluntarily.

3. Speculate.
 8

D. Behavioral Characteristics of Middlemen and Scalpers

1. Are short tenn oriented.

2. Generally take a detached view.

E. All Participants Are Continually Gathering Information About the

Marketplace

1. What is above contract highs ?

2 . What is below contract lows ?

3 . Where are buy stops ?

4. Where are sell stops ?

5. What is at yesterday's high?

6 . What is at yesterday's low?

7 . What is at the weekly high?

8 . What is at the weekly low?

9 . What is really occurring when the 10 , 2 0 and 3 0 day moving

averages cros s ?

F. All Participants Have a Natural Need to Promote Trade.

We use the term trade facilitation when discus sing the promotion of
trade. Volume is the best measure of trade facilitation. The
"pattern" of the Market Profile. is the second best measure.
If trade is not being facilitated succe s sfully, s omething will
have to change to get trade started again. Price is what nonnally
changes .
 9

n. TH E TRADE FACILITATION PROC ES S

(Or, Trade Promotion Process)

.A. In the trade facilitation process, we are lookinq for the

continuous creation of activity between all market parti.cipant s.

When that activity s tops or changes , old opportunities have ended

and new opportunities are developing. The most succe s sful traders
will be those who reco�e tlrls change and�. (Many can
reco�e the change, but few can act.)

Trade facilitation measurement is one of degree and is

subjective.

B. Evaluating Longer Term Trade Facilitation.

1. Volume - The best mea sure of overall trade facilitation.

a. Unchanged

b. Greater

c. Les s

2 . Value Area - The next bes t measure of trade facilitation.

a. Unchanged

b. Wider

c. Narrower
 10

3. Value Area Placement

a. Overlapping

b. Higher

c. Lower

4 . Attempted Direction

Most major trading errors stem from here. First you must
answer the que stion: "What was the market trying to do ? " "Was
it trying to go higher, lower, or wa s it simply trying to come
into value ? "
Secondly, you must evaluate how succes s ful the market
was at what it was trying to do. For example, suppose
today's market establishes higher value but lower volume. We
do not really know if this is bullish or bearish until we
examine a tt empted djrection. If the market opens .on its low
and moves higher, then the resulting lower volume probably
means that the up auction is slowing, as higher prices are
cutting off activity. If, however, the market opens on its
high and. attempts to sell off, this probably indicates that the
buying auction is continuing- - since the attempted sell-off is
attracting les s volume.
Thirdly, you must differentiate between price and value.
Rarely do "price traders " and "value traders " see the market
Similarly. For example, a market that opens below value,
auctions higher and finally ends the day with lower value,
lower volume and unchanged price may be viewed as strong by a
price trader, since the market "traded up" since the opening.
However, this s ame scenario is perceived as very weak by the
value trader, a s lower value and lower volume were created as
the market attempted t o trade higher (from the open). HiCJher
prj ces were cutting off activity. To aid the trader in the
determination of attempted direction, we offer three
"Composite" parameters (see next page):
 11

a. Buying Composite day - Open is in the lower 25% of the

range.

b. Selling Composite day - Open is in the upper 25% of the

range.

c. Neutral Composite day - Open is in the middle 5 0% of the

range.

5 . Old Busines s vs . New Busine s s

a. Short Covering

b. Liquidating Breaks

c. Gaps
 12

6 . Other Structural Signs

a. Tails

b. Range Extension

7 . Dominant Activity

We are always trying to compare the strength of the initiating

participants relative to the responding participants . These
changes are often s ubtle and slow to develop. An auction has
ended when the responsive party has a greater effect than the
initiator.

On the following pages, we introduce a rather complex set of

"Trade Facilitation Relationships ." Twenty in all, they are
s ummarized in Figures 1 and 2 . Then, detailed examples of six
selected scenarios will follow.
 13

8. Trade Facilitation Relationships--And What They Mean.

PRICE TRADERS VALUE TRADERS

Att Day Timeframe Longer Time frame

D..iJ: Relationship Sentiment Sentiment

a. up Higher Volume, Higher Value

(see example pp 15)
1. Price Up Very Strong Very Strong
2 . Price Down N/A v N/A

b. up Lower Volume, Higher Value

(see example pp 16)
1. Price Up Very strong Weakening & Slowing
2. Price Down Non-conviction Weakening & Slowing

c. up Higher Volume, OL to Higher Value

1. Price Up Very strong Moderately Strong
2. Price Down Weak Could Be Balancing

d. up Lower Volume, OL* to Higher Value

1. Price Up Strong Slowing, Balance
2. Price Down Weak Slowing, Balance

e. up Higher Volume, Unchanged Value

1. Price Up Strong Non-conviction, Balancing
2. Price Down Weak Non-conviction, Balancing

f. up Lower Volume, Unchanged Value

1. Price Up Strong Slowing, Balancing
2. Price Down Weak Slowing, Balancing

g. up Higher Volume, Lower Value

1. Price Up Strong Unclear
2. Price Down Weak Unclear

h. up Lower Volume, Lower Value

1. Price Up Non-conviction Weak
2. Price Down Weak Weak

i. up Higher Volume, OL to Lower Value

1. Price Up Strong Non-conviction
2. Price Down Very Weak Non-conviction

j. up Lower Volume, OL to Lower Value

(see example pp 17)
1. Price Up Strong Weak
2. Price Down Weak Weak

Figure 1. Trade facilitation relationships. * OL=overlapping

 14

8. Trade Facilitation .Relationships (continued).

PRICE TRADERS VALUE TRADERS

Att Day Timeframe Longer Timeframe

JllJ: Relationship Sentiment Sentiment

a. Down Higher volume, Lower Value

(see example pp 18)
1. Price Up N/A N/A
2. Price Down Very Weak Very Weak

b . Down Lower Volume, Lower Value

1. Price Up Non-convict ion Strengthening, slowing
2. Price Down Very Weak Strenghtening, Slowing

c. Down Higher Volume, OL to Lower Value

1. Price Up Strong Could Be Balancing
2. Price Down Very Weak Moderately Weak

d. Down Lower Volume, OL to Lower Value

(see example pp 19)
1. Price Up Strong Slowing, Balance
2. Price Down Weak Slowing, Balance

e. Down Higher Volume, Unchanged Value

1. Price Up Strong Non-convict ion, Balance
2. Price Down Weak Non-conviction; Balance

f. Down Lower Volume, Unchanged Value

1. Price Up Strong Slowing, Balancing
2. Price Down Weak Slowing, Balancing

g. Down Higher Volume, Higher Value

1. Price Up Strong Unclear
2. Price Down Weak Unclear

h. Down Lower Volume, Higher Value

(see example pp 20)
1. Price Up Strong Strong
2. Price Down Non-convict ion Strong

i. Down Higher Volume, OL to Higher Value

1. Price Up Very Strong Non-convict ion
2. Price Down Weak Non-convict ion

j. Down Lower Volume, OL* to Higher Value

1. Price Up Strong Strong
2. Price Down Weak Strong

Figure 1 (cont.). Trade facilitation relationships . * OL=overlapping

 15

Trade Facilitation Relationships - Examples

A1::t
a. � Ilfi�tj
9 ernesw£e, 0 Higher Value
Price
Up
DT
Strong
LT
strong
i Down N/A N/A
88 10 /32

I
88 9 /32

I
88 8 /32

I
88 7 /32

I
9000
88 6 /32
88 5 /32

I
88 4 /32 I
88 3 /32

I
88 2 /32 I

I
88 1 /32

IJ
88 0 /32

IJ
87 31 /32

IJ
87 30 /32

IJ
87 29 /32

IJJt
87 28 /32

IJJt
87 27 /32

IJJt
87 26 /32

IJJt
87 25 /32

IKL
87 24 /32

IKL
87 23 /32

IKL
87 22 /32

BIKL 8800
87 21 /32

BIKL
87 20 /32

BIKL
87 19 /32

BIKL
87 18 /32

BIKL
87 17 /32
87 16 /32
87 15 /32 HI.
87 14 /32
87 13 /32 It--
87 12 /32 HI.
87 11 /32 HI.

B
87 10 /32 HI.

B
87 9 /32

B
87 8 /32

B
87 7 /32
87 6 /32

8600
87 5 /32 GB
87 4 /32 GB
87 3 /32 GB

jlV
87 2 /32 DG
87 1 /32 DG
87 0 /32 BDFG
86 31 /32 BDEFG
86 30 /32 ABDEFG
86 29 /32 ABCDEFG
86 28 /32 ABCDEF
I ,/.
86
86
27
26
/32
/32
ABCDEF
ABCE . q{/ - '/Z
A
86 25 /32 ABC

A
86 24 /32

A
86 23 /32

A
8400
86 22 /32

A
86 21 /32

A
86 20 /32

A
86 19 /32

A
86 18 /32

A
86 17 /32

A
86 16 /32

A
86 15 /32

A
86 14 /32

A
86 13 /32

A
86 12 /32

A
86 11 /32

A
86 10 /32

�
86 9 /32
86 8 /32
86 7 /32

85 20 /32
, &oAr
85
85
19
18
/32
/32 L o",�
85 17 /32 L
85 16 /32 GHI.
85 15 /32
xS&
December treasury banda,
85 14 /32
85 13 /32 AEGBIJKL Figure 1a.
85 12 /32 ABEGJK September 1-2, 1988. Data
85 11 /32 ABEFG Courtesy ot COIIIiIIIOd ty Quota
85 10 /32 ABCEFG Graphics.
85 9 /32 ABCDEF
85 8 /32
85 7 /32 �DEF
CBOT.
85 6 /32 AD
85 5 /32 Copyright 1984
85 4 /32

Volume 132,000 403,000

 16

Trade Facilitation Relationships - Examples

Att
Dir Relatjonship Price LT
-12.'L
b. Up Lower Volume, Higher Value
Up strong Weakening
Down Non-con. We akeni ng
4378
4376 C
4374 AC
4372 ABC
4370 ABC
4368 ABC '" l�g7 CQ(; BJC.
4 3 66 ABC
4364 ABCDK
4 3 62 ABCDFK
4360 ABDFJKL
4358 ADFJK
4356 ADFJK
4354 ADEFGJK
4352 ADEFGIJ
4350 AEFGHIJ
4348 AEFGHI
4346 AEFGHI

ZAFG
4 3 44 AFGH
4342 A
4340 A ZAFG
4338 A Z
4336 AFI Z
4334 YABEFIJ YZ
4332 YZABEFIJ YZ
4330 YZABEFGIJK o
4328 YZABDEFGHIJK
4326 YZABCDEFGHIJK
4324 YZABCDEGHIJKL
4322 YZACDEGHJK
4320 YZCDEHJK
4318 YCDHJ
4316 YC
4314 Y
4312 Y
4310 o
4308 Y
4306 Y
4304 Y
4302 Y
4300 Y
4298 Y
4296

Volume 5 6 , 000 3 7 , 000

Figure lb. August COMEX gold, July 2 8 - 2 9 , 19 8 8 .

Data Courtesy o f Commodity Quote Graphics.
(Note: Windowed bar chart is the December contract,
however, the relationship is the same.)
 17

Trade Facilitation Relationships -

Examples

�
Att
Relationship
Price DT LT
j. Up Lower Volume, OL to Lower Value Up strong Weak
Down Weak Weak
90 3 /32 L
90 2 /32 L
90 1 /32 L
KE'.:r�e'ilON
........................................ 9600
90 0 /32 L
89 31 /32 L _
-
-

89 30 /32 L
89 29 /32 L
89 28 /32 L
89 27 /32 L

i
89 26 /32 L
89 25 /32 L
1
89 24 /32 L

....j1 .
89 23 /32 L
89 22 /32
9';'nn
AL

ABDL
89 21 /32 AL -- -

1
89 20 /32
89 19 /32 OBDL

��g:�CL.DS� J
89 18 /32 ABCDL
89 17 /32
89 16 /32 E
89 15 /32 ABCDEL DE
89 14 /32 ABCDEFL DE
89 13 /32 ABCEFL DE
89 12 /32 BEFL DE
89 11 /32 BFGL DE
89 10 /32 BFGL DEJ
89 9 /32 BFGHKL DEJ
89 8 /32 FGHK DEHJK
89 7 /32 FGHK DEFHJK
89 6 /32 FGHK CDEFGHJK
89 5 /32 GHK CDEFGHIJK
89 4 /32 HJK BCDEFGHIJK
89 3 /32 HIJK BCDEFGHIJKL
89 2 /32 HIJK BCDFGHIJKL
89 1 /32 HIJ ABCDFGIJKL
89 0 /32 HIJ ABFGIJKL
88 31 /32 HIJ ABFGIJKLM
88 30 /32 HIJ ABGL
88 29 /32 HIJ ABGL
88 28 /32 J ABG
88 27 /32 J AB
88 26 /32 AB
88 25 /32 AB
88 24 /32 OB
88 23 /32 AB
88 22 /32 A
88 21 /32 A Copyright 1984 CBOT.
Volume 369,000 281,000 -.:2"1 0/.
-
-

Figure 1c. June treasury bonds, April 14 -15, 19 8 8 .

Data Courtesy of Commodity Quote Graphics.
 18

Trade Facilitation Relation ships - Examples

A1:t
Dir Relationship Price DT LT
a. Down Higher Volume, Lower Value Up N/A N/A
Down Weak Weak
4170 y
4168 Y
Y I
nBC
4166

j
4164
4162 OZABCDE
4160 FIJlt YZABCDEF
AEFIJlt ZABDEF
ZAF
4158
AEFIJlt
ZAF
4156

..........................................., 4750
4154 ZABDEFGElIJ'ltL
4152 YZABCDEFGElIJlt F
4150 OZABCDEFGB F
4148 YZABCDGB F
YZCGB F
FG
4146
4144 YZC
4142 YZC FG
4140 YZC FG
4138 YZC G
4136 YZ G
4134 YZ G
4132 Y G
4130 G
4128 G
4126 G
4124 G
4122 G
4120 GJ
4118 GJlt
4116 GJlt
4 1 14 GJlt
4112 GJXL
4 1 10 GJlt
4108 GHJ
4106 GBIJ
4104 GBIJ
4102 GBIJ
4100 GBIJ
4098 GBIJ
4096 GBIJ
4094 GBIJ
4092 GBIJ
4090 GBIJ
4088 GIJ
4086 GIJ
4084 GIJ
4082 GIJ
4080 GIJ
4078 IJ
4076 IJ
4074 IJ
4072 J

115 i22 12:;< !5

4070 J
4068
4066 Copyright 1984 CBOT.

Volume 35,000 51,000

Figure Id. December COMEX gold, September 19 - 2 0, 19 8 8.

Data Courtesy of Commodity Quote Graphics .
 19

Trade Facilitation Relationships Examples

Belati onshlp
Att
Dir Price ·DT LT
Up Strong Slowing, Balance
d. Down Lower Volume, OL to Lower Value Down Weak Slowing, B al ance
27 5 . 80
27 5 .7 0 o
27 5 . 60 B
27 5 . 5 0 B
27 5 . 40 B
27 5 .30 B

© 1987 CQG
27 5 .20 B
27 5 .10 B I1�C.
27 5 . 00 B
274. 90 B
27 4. 80 B

y/1;.: fl'l ···· 8000

27 4. 7 0 B
·········
274. 60 B
274. 5 0 N B

:A
27 4. 40 NP BC
274. 30 NP BC
27 4. 20 LNP BC
27 4. 10 HLNP BC
27 4. 00 GHLNP BC
273. 90 GHLMNP BC
27 3. 80 GHKLMNP CLM
273. 7 0 EGHIKLMN CLMN
273. 60 EFGHI JKLMN CFLMN
273. 50 EFGHIJKLMN CEFGHKLMN
273. 40 DEFGHI JKM CEFGHKLMN

1111[1 .1�1
273. 30 DEFGH I JKM CDEFGHKLMN
273. 20 DEFGH I JKM CDEFGHIKLMN

H
273. 10 CDEFGIJKM CDEGHIKLMNP
273. 00 CDF I J DEGHIJKLMNP :
272. 90 CD IJ DHIJKLMNP
272. 80
................... 26UUU1
.
CDJ DHIJKLNP
272. 7 0 BCD D I JKNP
272. 60 BCD D I JKN
272. 50
272. 40
BCD
BC
DJK
DJK I
I
I
272. 30 BC JK
272. 20 BC K
27 2. 10 BC I
I
272. 00 BC
271. 90
?c;nnn I
BC
27 1. 80 .......................... �----I
.
BC

I
27 1. 7 0 BC
27 1. 60 BC
271. 50 BC
27 1. 40 BC
27 1. 30 B
27 1. 20 Copyright 1984 CBOT • .;:..1=-1 ....L.:.
1 ::=-. ..; : ...c.:...
..: ��8
....J..: ___---1

Vo lume 33,000 31,000

Figure Ie. September S&P 5 0 0 August 3- 4 , 19 8 8.
Data Courtesy of Commodity Quote Graphics.
 20

Trade Facilitation Relationships - Examples

Att
llir Relatjonsbjp Price DT LT
Up Strong strong
h. Down Lower Volume, Higher Value Down Non-cnn. Strong
88 21 /32

·1
88 20 /32 L

I
88 19 /32 L BC
f.:) 1."'O�'7 ("'CII"; ; , ,.....
fJ(",
I
88 18 /32 L ABC T

9000 1
-- .... I ..........._. ..

88 17 /32 L ABC
88
88
16
15
/32
/32
L
L
aBCI
ABCGI " "
• • • • • H H H H • • H. H • • H H H • • • H H • • H • • • • • • • •

88
88
88
14
13
12
/32
/32
/32
L
L
ABCOGHI
ABCOGHI
,;,- 'lIZ : : j I
. . .'b 1 1 1)(
L ABCOEFGHI
88 11 /32 L ABCOEFGHIK
88 10 /32 L ABCOEFGHI K
88 9 /32 L ACEFGHIK
88 8 /32 KL ACEFGIJK
88 7 /32 KL EFIJK
88 6 /32 AKL E I JK
88 5 /32 AKL E I JK
88 4 /32 AKL I JKL
88 3 /32 AK I JKL
88
88
88
2
1
0
/32
/32
/32
AK
AJK
AJK
JKL
KL
KL
"t
87 31 /32 AJK KL
87 30 /32 AJK KL
87 29 /32 ABJK KLM
87 28 /32 ABI J KL
j

j
87 27 /32 ABCIJ
87 26 /32 ABCI J
87 25 /32 ABCHI J

I
87 24 /32 BCHI
87 23 /32 CHI
87 22 /32 CEFGHI
87 21 /32 CEFGH
87 20 /32 COEFGH
87 19 /32 :::400

" "l
CDEFGH
87 18 /32 CDEFG
87 17 /32 OEG
o

jj
87 16 /32
87 15 /32 D
87 14 /32 D
87 13 /32 Copyright 1984 CBOT.

Volume 280,000 189,000

8

Figure 1£. December treasury bonds, September 9 -12, 19 8 8 .

Data Courtesy of Conunodity Quote Graphics .
 21

9. Recon:ting Longer Timeframe Information.

a. Factors to isolate:

L Buying vs. Selling

2 . lni:ti.ative vs. Responsive ( strength)

3. Value Area Placement

4 . Attempted Direction.

5 . Volume
 22

b. The Long Tenn Activity Recoro.

II I I

I S E L L I N G I
I BUY I N G I
I
I I I

i
I I I-
I
I !RESPONSIVE INITIATIVE INITIATIVE RESPONSIVE! I
IVAL DIRI ( weaker )
In"'t- .... v.v
( stronger ) ( stronger ) ( weaker ) IDIRIVAL
S a I
r t Q R T ivaluA ArAa T R Q _t _r a I R ! V,viVOL
I I
I I
I I

I I
I I
I I

I I
I I
I I

I I
I I
I I

I I

I
I I
I I

I I
I I
I I

Figure 2 . The Long Term Activity Record.

Legend: T=Initiative Tail (extreme), t=Responsive Tail,
R=Initiative Range Extension, r=Responsive Range Extension,
O=Initiative TPO's, o=Responsive TPO's , V=Clearly Higher
or Lower Value, v=Over1apping-to-Hi r or Overlapping-to-Lower
Value, B=Buying Composite day, S=Se . g Composite day.
�;
 23

3. Interpreting Long Term Activity Collecti.vel.y.

The Dalton LTA and WINdoTRADEr"·

a. The Dalton LTA - Long term activity record.

b. Bar Value Charts - Daily bar charts containing value area and
point of controL

c. The PRI - Longer term s trength index based exclusively

on market-generated informatio�

7 0 - 10 0 = BUlli s h
31 - 6 9 = Neutral
a - 30 = Bearish

Iun
SELLI"GIBUYI"G
resI"! I I"Ires
",B8-22 47
DATE PRI
I RO
B8-23 41
Bu

B8-24 71
ORTIT

B8-25 uS tOR I 53
ITRO BU

B8-26 US 32
",B8-29 uS 11(
ORTI

B8-38 US 8
ORT

B8-31 18
ro

89-81 R 1£:.
RO Bu

89-82 US 8
OR
t 0
B9-B6 u 8
RT

89-87 u 8
RT ROt

B9-B8 8
RT ROt

89-B9 uS 8
t R RO Bu

",89-12 U 8
ORT u

B9-13 2
R tro

B9-14 7
t R RO u
0
B9-15 US 8
R u
0
89-1£:. U 8
RT

",89-19 U 3
ORT t B

89-28 US 8
tro

8 88
t

Figure 3 . The Dalton LTA.

 24

c. Market Activity

Market activity is created through a continuous two-way auction

proces s , from high to low and from low to high. In an up auction,
what is being purchas ed continues to rise in price until the
highest bid is filled. In a down auction prices are offered down
until the lowes t offer is satis fied. As the auction continues , the
bidders or offerers are either satis fied or stand aside until only
one party remains. This last participant has either s old too
cheaply or paid too dearly, establishing at least a temporary high
or low price (herein after referred to as "exces s ").

L Excess .

Exces s can develop in any period o f time. V 2 hour, 1 day, 3

days , 1 week, 1 month, 1 year or several years (we will
subsequently refer to these periods as timeframes).
The best trading opportunities will occur at the moment of
exces s , and will dllruId s h as price moves further away from the
exces s .

a. Day time frame exces s

7882 · · · · ·

7880 · · · ·

7878 · · · · · · E · E
7876 · E · E
7874 · · · E · · · · · E
7872 C · · E · · · · · CE
7870 C · 0 E · · J CDEJ
7868 C · 0 E F · · I J CDEFIJK
7866 Y · · C · 0 E F G · I J YCDEFGI J
7864 Y · · C · 0 E F G · I J YCDEFGI J
7862 Y Z · C · · · F G H I J Y ZCFGHI J
7860 Y Z B C
· · · G
· H I · YZBCGHI
785 8 Y Z B C G H I YZBCGHI
0
· · ·

785 6 Z B
· · G
· H I · OZBGHI
7854 · Z A B · G
· H I · ZABGHI
7852 · Z A B · · · H ZABH
7850 · Z A B · · · · · · · · ZAB
7848 · · A · A
7846 · · A · · · · · · · · · A
7844 · · A · · · · · A
7842 · · · · ·

7840 · · · · · ·

Copyright 1984 CBOT .

Figure 4 . Day time frame exces s. June Japanese

yen, March 8, 19 8 8.
 25

b. Swing and longer timeframe exces s

.� 10 6C:8 DAILY BAR €I 1?87 CQG HlC.

0= 4417
H= 4418
L::: 4402
L= 4407
t.= -2.

� 4800

l
f
l

I
l

4400

'..JV
'� el= 4417
'_" 'J.

I 1"= 4418
� L= 4402
t c= 4407

��PYRIGHT 1987 COG INC.

Figure 5 . Swing and longer timeframe exces s , December Comex

gold, March 15 - August 15 , 19 8 8 .
 26

2. T imeframes . One-timeframe vs . Two-timeframe Markets .

Each market part ic ipant has a 91 31 C

d i f f erent t imeframe . Some, 91 30 C
such as that of the scalper on 91 29 C
the trading f l oor , only for sec­ 91 28 C
onds or minutes long . others are 91 27 CD
long with many varying lengths 91 26 BCD
in between . The market's auction 91 25 BCD
process is continually searching 91 24 ABCD
out a l l of these d i f ferent t ime­ 91 23 ABCDFG
frames trying to entice them 91 22 ABCDFGH
into doing bus ine ss . 91 21 ABDEFGH
When a market i s rotat ing , 91 20 ABDEFGH
looking for both buyers and 91 19 a. ABDEFGH1
sel lers, we c a l l it a two-time­ 91 18 ABDEFGH1
frame market . When a market 91 17 ABDEFGH1
continues in one direction it i s 91 16 ABDEGH1
referred to as a ooe-timeframe 91 15 ABEH1
market . 91 14 ABEH1
91 13 AB1
a . Rotational, Two-timeframe 91 12 B1
Market 91 11 I
91 10 I c.
91 9 I
91 8 I
91 7 I
91 6 1JK
91 5 1JK
91 4 b. 1JK
91 3 1JK
b . One-t ime frame Market 91 2 JK
91 1 JK
91 0 JK
90 31 JK
90 30 JK
90 29 JK
90 28 K
90 27 KL
90 26 KL
90 25 KL
c . Two-timeframe turned One­ 90 24 KLM
t imeframe Market . 90 23 KL
90 22 KL
90 21 KL
90 20 KL
90 19 KL
F igure 6. Two-timeframe turned 90 18 KL
one-t imeframe market, 90 17 KL
June treasury bonds, 90 16 KL
May 6, 1987 . 90 15 K
90 14 K

Copyright 1984 CBOT .

 27

3. The Auction.

The auction is the market's means for establishing a fair price

to conduct busine s s . It is in this proces s that price excesses
are created. The auctions also determine the shape of the
profiles . Exces s is created because price must auction too
high or too low before you know price has reached an extreme
(another term for exces s).
The auction determines the fair price at which to do
busines s . Price o nly has t o be fair in the day tjmeframe. What
is fajr for the day timeframe may be fair or unfair for the
longer timefrarne.

4. Price.

Price is the market's mechanism for advertising opportunity.

Most traders misunders tand the purpose of price. In effect,
most traders concern themselves with price, not value.
 28

5 . Time.

a. Price exces ses, extremes or opportunities (these are all the

s ame thing) are regulated through time. Thus, the market
regulates itself through time. If it is truly a good
opportunity it should not exist for very long.

b. Over time, it is the lasting acceptance and quick rejection

of price that creates the Market Profile* s tructures. llme.
BujJd s Structure.

c. Time is the market 's invisible referee--if yardage is not

gained in one direction, the ball will be turned over.

d. Time is a two-edged sword--time goes from acceptance to

rejection if too much time is spent at one price.

e. Time is also cumulative. The greater the frequency of

attempted auctions in a given direction, the greater the
likelihood that the market will eventually facilitate trade
in that direction.

6. Price vs. Value.

Most traders are locked into being price oriented, instead of

value oriented. The auctions establish the fair price or value
area. The price exces s es represent price away from value. It
is price away from value that provides opportunity. Thus, it
becomes clear that all prices are not equal and all
opportunities are not equal. Your money management plan should
incorpora te this concept.
 29

7. Behavior.

The auctions reflect the attitudes of the market participants,

thus creating market-generated information.

l.

D
97-10 Opening Range - I mportant
97-09 6. reference point for day
97-08 1. t imeframe traders.
97 -07
97 -06 AC 2. Init ial Balance - Act ivity
97 -05 AC in f irst 2 time periods
97 -04 2. ( for Bonds ) . Market

:J
97 -03 ABCD attempting to locate a
97 -02 ABCDGL range that w i l l al low two-
97-01 ABCDGHLM s ided trade to t ake p l ace.
97-00 ABCDGHLM 8.
96-31 ABCDFGHLM 3. Range Extension OT Sel ler-
96-30 ADFGHIJL 5. Activity extending bel ow
96-29 ADEFGHIJL � 7 . the init ial balance.
96-28 DEFJL
96-27 DEFJL 4. S ingle Print OT Buying
96-26 DEFJL Tai l - Price advertisement
96-25 DEJKL +- 9. below value area accepted ,
96-24 3. cau s ing long term buyers
96-23 KL to enter on the extreme .

�J
96-22
96-21 5. Value Area - Where 7 0% of
96-20 4. the day ' s bus ines s was
96-19 conducted . The market
96-18 ident i f ies a fair area for
Copyr ight 1984 CBOT . the day t imeframe onl y .

F igure 7. Anatomy o f a Market Pro f i le* , September treasury

bonds , July 25 , 1986.

6. S ingle Pr int Sel l ing Tail - Initial opening was too high and
attracted attention of OT sel ler , who entered vo luntar ily and
caused pr ice to fal l away quickly .

7. Point of Control - The longest TPO/ price l ine c losest to the

center of the range .

8. Clos ing Range - Used only as a reference point.

9. A TPO - Time Pr ice Opportunity - TPO ' s are the bas ic unit
u sed to measure market act ivity .
 30

8. Auction Duration.

For simplicity, we have broken the auctions down into:

a. 1/2 Hour Auction - Our shortest auction.

b. Day Auction - Consisting of a string of 1/2 hour auctions.

c. Swing Auctions - Usually consisting of from 3 days to 2

weeks.

13 2�' �;PU8 DAILY BAR

0=2,,·141)
H=.X·X·O
L=26100
L=2t'.2';':,/\
t.=. +l�O

�
11..III!Jl � Q
tl I
;11
:1.
. .

III I I
, I '[,1

I II
Ill!', t,I··· .....
' I ill I
cD i( [Ill
i

�. rl .
l'
115

COPYRIGHT 1�S7 COG INC. o = Excess

Figure 8. Swing auctions bounded by exces s . September S & P

5 0 0, February 1 5 August 15 , 19 8 8 -
 31

d. Intennediate Tenn Auctions - Subsequently referred to as

brackets.

e. Long Tenn Auction - Can be several months o r years. A long

term auction ends in a bracket or intermediate term auction.

\
13 29 SP!J8 DAILY BAR
0=2.;140
l

J2;)OO'
H=2��.�:60

..
.
L=26100

i:.= +170
. .
L=262:;'S \
L onger Term Bracket High
. .. _- _ . .. - I --
1
__

111
.
. . __ . .

'
I I
i I j
I
I� f1 I .
111111 h Illlldlj' I
1,
. II1I1 ·
11" I I 1':';'(100
I
I
I

I Wli
I
i
Ii I
11' ':1;1I
�
I

I ,, '
I

I ,
!

I tI , . fl
Idl
illl
1111)
11I1
II ! I
jI 1. .... 1I
I'::" �jUU
I'll
If I I
11
j I
'I
I
I

f' )
I

� ;!6
' ,8�:
Longer Te TIn Eracket Low
--:--j::ClOO!I
I I

o=2
H=2.;360 i
L=26100 i
C=2';2?5 Juri AU'�1
I
L-.__ J.:...:'---'=-'::.....J.::.---L---L::...:.-l:::..:.....J=-L:...-.t.:.=--..t.:.:::.�....t::...--L..--
:::-t::..: ; -.J
:....r ::: ·I :::.
-L:. :·:::.:
0-.l .. !:. ...; ; i:;:.... 2'::.:' .t::.
11 :::. :... ..l.!.:
..:... l2-�:...::..J: :
.::-.l.'� .. ....:.:.
:! :.._ .:
l 5�_-.-J

COPYRIGHT 1937 COG INC.

Figure 9 . Longer term auctions bounded a bracket. September

S & P 5 0 0 , February 15 - August 15, 19 8 8
 32

IlL , THE CONFLUENCE OF STRUCTURE, TIME " LOOIC

L
L
L\I
L
I
L
L
o\L
AL
ODL
\DKL
ADHIKL
KDfHlJK
KDEHlJK
\CDEHlJK
·\BCDEHlJK

."4RKET
STRlCTt'RE

.\BCDEHlJK
o\BCDEHIJK
\ACDEHlJK
ACEHiHJK
AIlH·CiHJK
�HJK
HeFK
BHK
F
F
f

Figure 10. The confluence of structure, time and logic.

Maximum trading effectivenes s requires a keen understanding of both the

differences and the inte�y among market structure, market time and market
logic.

A.. Market Structure

Structure is clearly the most tanqillle information generated by the

market. It starts with TPO's and the 1/2 hour auctions. As the
day progres ses structure takes the form of range extension, tails ,
day type, value area and value area trends .

1. Day Timeframe Structure.

a. What happened

b. When it ha�ned
,

c. By whom
 33

2 . Longer Term Structure.

a. Exces s

b. Bracket tops and bottoms

c. Value area trends

B. Time.

Time forms structure, and occurs long before structure is complete.

Time is intangible. It is also relative. The role and proper
interpretation of "time" varies with each commodity and each market
cycle.

1. Traders need experience to recognize time and gain the

confidence to act.

2. An understanding of time is the key to understanding market

activity before it is revealed by structure.

3. Good trade location only comes with a sound understanding of

t.ime.
 34

C. Market Logic.

-In its highest form, market 1Dg:ic is the raw human :i.nstllx:t of the
marketplace. -

Market logic is more than just an understanding of the functioning

of the marketplace. It is understanding the role s , actions and
personalities of each of the market's participants . It is
understanding that the market and its behavior is , in fact,
logical- -that the market exists for a reason, and that there is a
reason behind every change and every activity that takes place.
When price changes, it changes to satis fy the conditions of the
marketplace.
Market logic is knowing all of these things , but more
importantly, market logic is understandjng why.

True "market logic" comes only through intensive participation and

careful exandnation of real situations.

1. Market Logic Supersedes Even Time.

2. Market Logic Demands the Highest Degree of Confidence.

3. It is Self Taught.

4 . Market Logic is the La st Step in Becoming an Expert.

Market logic is a level of market understanding that can only

evolve when you immers e yourself in the market. It is an
understanding that trading is like a game in that it involves may
other participants, each trying to win, each employing their own
strategy and ethics to the game. Those that do well will be those
that understand the behavioral characteristics of the other
participants . The downfall of many traders is that they never
recognize the importance of market logic.
 35

5. Examples .

a . Market logic means understanding that s ome days are

controlled by the short term trader and are dixectionles s .
Here, the locals are able to "run" the market up and down
with ease--trading just for trading, and nothing more.

b. Market logic i s understanding the greed and emotional element

that allows a market to get too long or too short, which in
turn leads to an understanding that the market needs to break
to rally and rally to break--both short term and long term.

c. Market logic is understanding the "herd instinct."

d. Market logic is understanding that the longer a market has

moved directionally without a break or rally, the more
complacent the traders have become, and thus the more likely
an opposite move will not only occur, but also be dynamic.

e. Market logic is understanding how good intuitive traders use

the "news " to judge the strength or weaknes s of a market.
Or, understanding the " squaring-up" of po sitions that often
precedes an important figure release.

f. Good market logic traders will be aware of market psychology,

i.e., the bond market is looking at oil, the yen and the CRB
index ins tead of trading on its own.

g. Market logic include s an unders tanding that in a bull. market

traders will attempt to mark price down at the opening.

h. The market logic trader will quickly recognize subtle signals

from the day's trading. That is , when a market trades within
a tic of "taJdng out" yesterday's high, but did not quite get
there. Or, taJdng out yesterday's high or low but getting no
follow-through.
 36

Other market lo�c experience factors;

i. It is a lot easier to sell while the market is

still rallying than to wait for the turn.

"Good
Pil l " "Sad
Pil l "

Selling when a market is nsmg results in a "good fill" , at

least at that moment in time. Conversely, selling when price
is falling generally results in a "bad fill" , or a le s s
attractive sell price.

j. Market logic is understanding volatility.

k. Market logic is understanding "quantitative" market

participants , i.e. as set allocators , buy and sell programs,
etc.

L Market logic is understanding why trend days do not rotate.

m. Market logic is understanding why premium is bullish and lack

of premium is bearish. It is also understanding why this
concept is a two-edged sword.
 37

IV. DAY TRADING THE S&P 5 0 0 Wl'l'H THE HARKET PROFILE·

A. USING PREMIUM LEVELS AND THE HARKET PROFILE· GRAPm:c TO

GUIDE YOUR S&P TRADING.

By monitoring the premium (the spread between the cash and the future) in
conjunction with the development of the day's Market Profile. , traders may be
better able to determine if other timeframe activity is responsible for price, or
if it is just short term movement that will likely correct itself.

B. THE GOLDER RULE OF S&P TRADING.

The prenrium reflects market sentiment, and that sentiment exists for a reason.

c. THE ANTICIPATORY HA.TURE OF THE PR.EMIUH.

The premium level discounts the underlying changes in market oPQn1on that occur
throughout a trading day. Properly read, the premium is another fonn of market­
generated informatio�
 38

D. S&P S�READ FUNDAMENTALS.

1. S & P futures are a carrying charge commodity, therefore

the future is priced at a "premium" to the cash.

2. The "fair value" calculation tells us which

difference between the futures and the ca sh is
considered nonnal, or fair. Accordingly, there are
three pos sible opinions reflected by the premium
level:

a. Bullish bia s .

When the current premium (spread) is significantly

greater than fair value. When the premium is
bullish, the futures /cash spread widens. A bullish
premium generally infers bulli sh market conditions.

b. Bearish bia s.

When the premium is les s than fair value. Here, the

spread has narrowed. A bearish premium generally
infers bearish market conditions.

c. No bia s (i.e. when trading at fair value).

While mos t of us think of only two pos sible market

opinions --either buy or sell- -it is worthwhile to
keep in mind that "no opinion" is still valid
infonna tion.
 39

E. CALCULATING -FAIR VALUE-.

1. The Fair Value Formula:

Fair Value = Index x (1 + Time x (Rate - Yield)

where the "Index" is the current value of the cash

index; "Rate" is the current carrying rate (typically,
the broker loan rate); "Yield" is the combined.
dividend yield of all the stocks making up the index;
and "Time" is the time, in years, until contract
expiration.

2 . Exam�e: Suppose that the S & P cash index is at 2 7 0. 0 0,

broker loan rate at 1 0 % , the dividend yield is 4 % , and
three months remain until expiration. Since 3 months
is 1/ 4 of a year, we would express it as . 2 5. The
Fair Value formula would then be:

Fair Value = 2 7 0 . 0 0 x (1 + . 2 5 x (.10 - . 0 4 )

2 7 0 . 0 0 x (1 + . 015) = 2 7 4 . 0 5

F. TYPES OF BUY AND SELL PROGRAMS.

L Arbitrage Programs.

a. Triggered by mathematically-derived. premium levels

(when the spread between the cash and the future is
attractive enough to cover commis sions , cover the
spread between the tilid and offer, and to make a
profit).

b. A "buy" arbitrage program is a program to buy

s tocks (cash) and sell futures . Conversely, a sell
program is a program to sell stocks and buy
futures.

c. Market Impact. Day timeframe programs (generally)

that only affect the "minute hand" of the market,
not the hour hand.
 40

2. Institutional Block Programs.

a. The voluntary accumulation or liquidation of large

blocks of stock.

b. Market Impact. Because of their size, they can

have an obvious influence on the minute hand. More
importantly, because they are the result of longer
term decision-making they also impact the hour hand
of the market.

3 . As set Allocation Programs .

a. Large programs conducted by institutions to buy

stocks and sell bonds, or vice versa.

b. Represent a shifting of as sets.

c. Market Impact. Influence both short and longer

term market movement.

d. Often enter the market with "brute force. "

e. Two Types of As set. Allocation Programs:

1. Those that are triggered automatically by

quantitative a s set allocation models; and

2. Those that are ba sed on fundamental decision­

making.
 41

G. THE FOUR STAGES OF S&P PREMIUH/PROGRAM BEHAVIOR.

L Stage One -- Anticipation.

a. Floor Instinct.

There are times when floor traders can " sense" a

change in the make-up of the market. The premium
is away from fair value. Perhaps the activity
around a � or fir.ms known for program trading
begins to pick-up. Traders begin to prepare for
the program.

b. Off-Floor Instinct.

If you are a day trader trading S & P'S from off the
floor, it is critical that you develop the same
sense, the s ame expectations , using the market­
generated information offered by the premium and
the Market Profile * .

c . Off-Floor Advantage.

Experienced traders using the Market Profile * in

conjunction with a sound understanding of premium
behavior may actually be able to day trade the S & P
5 0 0 more succe s s fully from off the floor. Why?

1. The Market Profile * provides a Composite view of

market activity;

2. Helps decrea se the emotion of trading;

3 . Helps to evaluate the directional conviction of

the market (do one-timeframe or two-timeframe
conditions prevail? ); and

4 . Helps to detect through structure the impact and

s tatus of a program.
 42

2. Stage Two -- Seeking the Opportunity.

Even if the makings of a program are in the air, the

participant looking to do the program still must wait
for the right opportunity.

3. Stage Three -- Execution.

The most difficult leg of the program is generally

executed first. With the S & P, it is much more
difficult to buy or sell a basket of stocks than
futures contracts . Thus, in a buy program the aim is
to first buy the stock. Buying the stock, in turn,
may cause short covering in the futures , perhaps
increa sing the premium even more. Then, the
institution will turn around and lean on the future s - ­
selling it off, and a t least temporarily, narrowing
the spread.

Hc:te:If a firm is attempting to execute a program and

begins to sell aggres sively, floor traders will
quickly take note and "back away, " oftentimes allowing
the program to be completed. As the markets have
evolved, the off-floor capital often dwarfs the
combined floor capital, making it imprudent for the
floor population to stand in their way.

4. Stage Four -- Completion.

a. The Market Profile * can help determine when a

program is over with or nearing completion. (No one
is going to tell you when a program is over--the
only participant who knows is the executing finn
itself.)

b. Structural Clues and Time Alerts

"Time provides the signal, structure provides the

confirma tiOD."
 43

H. TRADING APPLICATIONS.

"By nrmitorirq the premium in conjunction with the

developnent of the days Market Profile * , traders can
determdne if other timeframe activity is responsible for
price, or if it is just a short term aberration that will
likely correct itself. "

L Two Fonns of Risk.

a. Market Risk.

b. B asis Risk.

2. An Example. Potential Risk Scenarios Induced By

Selling With A Bearish Premium:

The S&P opens and i.llrnediately drives downward, leaves

an initiating selling tail in its wake, pursues one­
timeframe selling trade and touts a bearish premium- ­
all indications that the market is weak.

a. The future COUld rise while the cash stayed

constant, the reby �ening the spread and bringing
it closer to fair value.

b. The cash could fall while the future remained

unchanged, also �ening the spread closer to fair
value.
 44

c. , The future could rise slighUy while the cash al so

fell slighUy.

d. The future could continue to fall while the cash

declined faster.

Notice that in three of the four scenarios, the future

does not fall as the futures /cash spread returns to
fair value. Only with true, sustained other time frame
selling will the future continue to decline. Thus, if
a trader ha s placed a short under these conditions , he
or she mus t have a high degree of confidence in the
other timeframe seller if he or she intends to hold
the short for longer period of time.

e. The Role of Time

If a short is entered with bearish premium that is

not s oon confirmed by further selling, it is a
worthy g�e to get out and take your profits
before you arrive at the bottom of a sell-off. When
the market hits bottom, time builds and a vacuum
for.ms that can quickly expand the premium and erase any
profits built into the trade.

f. Buying With Bearish Premium

1. Flies in the face of initiating selling

activity (selling with bullis h premium also
goes against the initiator).

2 . The need for instant confir.mation.

3 . Tjrnjog. Do not want to trade against

initiating activity too early. Rather, wait
until trade slows and has dis sipated over time.
 45

3. EXPANDED COMMENTARY: December S&P 5 00, September 9, 1988

To better demonstrate, how to monitor and use the premium, let us

examine the S & P activity of September 9, 19 8 8. Figure 11 shows the
opening range for the December futures contract on the left, and
the opening range of the cash S & P 5 0 0 market on the right.

September 9 September 9

269 . 00 267 . 00
268 . 90 266 . 90
268 . 80 266 . 80
268 . 70 266 . 70
268 . 60 266 . 60
268 . 50 266 . 50
268 . 40 266 . 40
268 . 30 266 . 30
268 . 20 B 266 . 20
268 . 10 >B 2 6 6 . 10
268 . 00 B 266 . 00
267 . 90 B 265 . 90 >B <- 2 6 5 . 8 8
267 . 80 B 265 . 80 B
267 . 70 B 265 . 70 B
267 . 60 B 265 . 60 B
267 . 50 B 265 . 50 B
267 . 40 B 265 . 40 B
267 . 30 265 . 30 B
267 . 20 265 . 20 B
267 . 10 2 6 5 . 10 B
267 . 00 265 . 00
266 . 90 264 . 90
266 . 80 264 . 80
December S & P Futures S & P 5 0 0 I ndex ( Cash )
Copyr ight 1 9 8 4 CBOT .

Figure 11. Opening Ranges . December S & P 5 0 0 futures, and S & P 5 0 0

Cash Market, September 9 , 19 8 8 . Data courte sy of
Commodity Quote Graphics.

At this time, the fair value wa s around 2 7 5 . The premium at the day's
open was about 2 2 2 ( 2 6 8.10 [ future s ] - 2 6 5 . 8 8 [ cash]), or 5 3 under fair
value. In other words, the market opened with a negative bias . As
shown in Figure 12 (shown on next page), The cash market proceeded to
sell off from the open of 2 6 5 . 8 8 to a low in D period of 2 6 3. 6 4 --a total
drop of 2 2 4 points .
 46

September 9 September 9

268. 20 B 266. 20
268. 10 >B 266. 10
268. 00 B 266. 00
267 . 90 B 265 . 90 >B
267 . 80 B 265. 80 B
267 . 7 0 BC 265 . 7 0 B
267 . 60 BC 265 . 60 B
267 . 5 0 BC 265 . 5 0 B
267 . 40 BC 265 . 4 0 B
267 . 30 C 265 . 30 B
267 . 20 C 265 . 20 B
267 . 10 C 265 . 10 BC
267 . 00 C 265 . 00 C
266. 90 C 264. 90 C
266. 80 C 264. 80 C
266. 7 0 C 264. 7 0 C
266. 60 C 264. 60 C
266. 5 0 C 264. 5 0 C
266. 40 C 264. 40 C
266. 30 CO 264. 30 CO
266. 20 CO 264. 20 CO
266. 10 CO 264. 10 CO
266. 00 CO 264. 00 0
2 65. 90 CO 263. 90 0
265 . 80 0 263. 80 0
265 . 7 0 0 263. 7 0 0
2 6 5. 60 0 263. 60 0 <- 263. 64
2 65. 50 0 263. 50
2 65 . 40 0 2 6 3. 40
2 6 5. 30 263. 30
December S&P Futures S&P 500 Index ( Cash )

Copyright 1984 CBOT .

Figure 12 . B-D Range. December S&P 5 0 0 futures and S & P 5 0 0

Cash Market, September 9 , 19 8 8. Data courtesy of
Commodity Quote Graphics .

The futures opened a t 2 6 8 .10, and sold off t o 2 6 5 . 4 0 - -off 2 7 0 . The

bottom of the day's range wa s at 2 6 5 . 4 0 in the futures and 2 6 3 . 6 4 in
the cash. Thus, the premium was 17 6 --roughly 10 0 points below the
2 7 5 . 0 0 "fair value" leveL
Remember that any premium above fair value is considered bullish,
while premium below fair value is considered bearish. At the bottom
of the day's range, then, such a low premium level alerts us to very
bearish conditions . However, if the negative market sentiment
indicated by this low a premium is not soon confirmed by additional
selling, then the concept of "Time" enters into the picture.
 47

Too much tUne spent at these lower levels actually speaks for
rejection of the lower levels in E and F periods (see Figure 13)
because the needed seller conficnation and further elongation of the
Market Profile* have not occurred. Further and equal selling in both
the ca sh and futures would have kept the spread equally below fair
value the whole way down. But, if further elongation does not occur,
we encounter Ttme's two-edged sword--if a market spends too much tUne
without continuing a trend move, trade reverts to the other tUneframe
participant. In other words , if the other tUneframe sellers fail to
confirm this bearish sentUnent, you will very likely s tart to auction
in the other direction, in which cas e new (responsive) buying in the
futures market would return the spread to fair value.
From this point, at the bottom of the day's range with a bearish 17 6
premium, the fair value level represents an additional 10 0 point risk,
in a sense a risk factor already built into any short positions .
There is no guarantee that the futures price will not return to trade
up and through fair value.
A quick glance at the Market Profile * of September 9 shows that a
change in the market did in fact take place, a s I period rallied price
above the previous range. But, the day's s tructure provided ample
clues . The lack of elongation (i.e. no selling range extension in
E, F, G or even H period, and consequent fattening of the day's Market
Profile * ) tell us that, regardles s of the bearish premium, this market
will not go down. Figure 13 shows September 9 , with a segmented Market
Profile * through I period, the tUne period which returned to retrace
the day's range in both the futures and the cash.
 48

September 9 September 9
268. 80 I 266. 80
268.7 0 I 266.70
268.60 I 266.60
268. 5 0 I 266. 5 0
268.40 I 266.40
268. 30 I 266.30
268. 20 BI 266.20
268.10 >BI 266.10
268. 00 BI 266. 00
267.90 BI 265.90 >B
267.80 BI 265.80 BI <- 265 . 7 6
267 . 7 0 BCI 265 . 7 0 BI
267 . 60 BCI 265.60 BI
267 . 5 0 BCI 265 .50 BI
267 .40 BCI 265 . 40 BI
267 . 30 CHI 265.30 BI
267 . 20 CHI 265 . 20 BI
267 . 10 CHI 265. 10 BCI
267 . 00 CHI 265.00 CI
266.90 CHI 264. 90 CI
266. 80 CEHI 264. 80 CI
266. 7 0 CEH 264. 7 0 CI
266. 60 CEFH 264 .60 CHI
266.5 0 CEFGH 264. 5 0 CEFH
266. 40 CEFGH 264. 40 CEFGH
266. 30 CDEFGH 264. 30 CDEGH
266. 20 CDEFGH 264. 20 CDEGH
266.10 CDEGH 264. 10 CDE
266. 00 CDEG 264. 00 DE
265 . 90 CDE 263. 90 DE
265 . 80 D 263. 80 D
265 . 7 0 D 263. 7 0 D
265 . 60 D 263. 60 D <- 263.64
265 . 50 D 263. 50
265 . 40 D 263. 40
265 . 30 263. 30
December S&P Futures S&P 500 I ndex ( Cash )

Copyright 1984 CBOT .

Figure 13. B-1 Range. December S & P 5 0 0 futures and S & P 5 0 0

Cash Market, September 9 , 19 8 8 . Data courtesy
of Commodity Quote Graphics .

The change in the futures on September 9 from the da)ts low up t o the
high of I period is a 3 4 0 point turnaround ( 2 6 8 . 8 0 - 2 6 5 .4 0). The net
change in the cash market is 212 ( 2 6 5 . 7 6 - 2 6 3 . 6 4 ). By the end of I
period, the spread of the market highs was 3 0 4 ( 2 6 8 . 8 0 - 2 6 5 . 7 6). The
important point here is that the Market Profile* gave us time to see
the trade developing. When L period rallies price as high as 2 71.4 0 in
the futures and as high as 2 6 7 . 8 4 in the cash market, the spread on the
da)ts highs is + 3 5 6 (see Figure 14).
 49

27 1.5 0 . 27 0.00
27 1.40 L 269.90
271. 30 LM 269.80
271.20 LM 269.7 0
27 1.10 LM 269.60
27 1.00 LM 269.50
27 0.90 LM 269.40
27 0.80 LM 269.30
27 0.7 0 LM 269.20
27 0.60 LM 269.10
27 0.5 0 LM 269.00
270.40 LM 268.90
27 0.30 LM 268.80
27 0.20 LM 268.7 0
27 0.10 LMN 268.60
27 0.00 LMN 268.50
269 . 9 0 LMN 268.40
269 . 80 KLN 268.30 .
269 . 7 0 KLN 268.20 M
26 9 . 6 0 KLN 268.10 M
269 . 5 0 KLNP 268.00 M
269 . 4 0 JKLNP 267 . 9 0 M
269 . 3 0 JKNP 267 .80 LM <- 267 .84 in " L "
269 . 20 JKNP 267.70 LM
269 . 1 0 JKNP 267.60 LM
269 . 00 JKPQ < - C lose 267 .5 0 LM
268 . 9 0 JKP 267 .40 LMN
268 . 80 I JK 267.30 LN
268 . 7 0 IJK 267.20 LN
268 . 60 IJK 267.10 LN
268 . 5 0 IJK 267 .00 LN
268 . 4 0 IK 266 . 9 0 LN
268 . 3 0 IK 266 . 80 KLNPQ <- Close 266 . 84
268 . 20 BI 266.7 0 KLP
268 . 1 0 >BI 266 . 60 KL
268 . 00 BI 266 . 5 0 K
267 . 9 0 BI 26 6 . 40 JK
267 . 80 BI 266 . 30 JK
267 . 7 0 BCI 266.20 JK
267 . 60 BCI 266 . 1 0 JK
267 . 5 0 BCI 266 . 00 JK
267 . 4 0 BCI 265 . 90 >BJK
267 . 3 0 CHI 265 . 80 BIJK
267 . 20 CHI 265 . 7 0 BI
267 . 1 0 CHI 265 . 60 BI
267 . 00 CHI 265 .5 0 BI
26 6 . 9 0 CHI 265 . 40 BI
266 . 80 CEHI 265.30 BI
266 . 7 0 CEH 26 5 . 20 BI
266 . 60 CEFH 26 5 . 10 CI
266 . 5 0 CEFGH 265 . 00 CI
266 . 40 CEFGH 264 . 9 0 CI
266 . 3 0 CDEFGH 264 . 80 CI
266 . 20 CDEFGH 264.7 0 CI
26 6 . 10 CDEGH 264 . 60 CHI
266 . 00 CDEG 264 . 50 CFH
26 5 . 9 0 CDE 264 .40 CEFGH
265 . 80 D 264.30 CDEGH
265 . 7 0 D 264.20 CDEGH
265 . 6 0 D 264 . 10 CDE
265 . 5 0 D 264 . 00 DE
265 . 40 D 263.90 DE Copyright 1 9 8 4 CBOT .
265 . 30 . 263.80 D
December S&P Futures S&P 500 Index ( Cash )

Figure 14. Completed day. December S & P 5 0 0 futures and S & P 5 0 0

Cash Market, September 9 , 19 8 8 . Data courtesy
o f Commodity Quote Graphics.
 50

The spr�ad at the days close was roughly + 216 ( 2 6 9 . 0 0 - 2 6 6 . 8 4),

slightly below fair value, indicating that early trade on the next
ses sion would probably be near or just below the days close on
September 9 .
Early trade on the day o f September 9 indicates negative market
sentiment. The market sold off, and the premium surged far below
fair value. But, the days structure showed no follow-through.
Eventually, trade occurred both above and below three days of
overlapping value, with a range of over 5 0 0 points.

4. "Trading The Premium" On Balanced Days.

a. The Premium as a Rotation Barometer.

During days exhibiting balanced, rotating trade,

the behavior of the premium can be an excellent day
trading guide.

b. Adjusting for underlying market sentiment.

Even if day time frame rotations demonstrate

balance, there can still be an underlying bullish
or bearish bia s . Thus , to properly interpret and
trade the premium during balanced conditions , the
trader must be sure that the underlying bia s is
factored into the evaluation.
 S1

5. Longer 'fimeframe Applications.

1. Basic Underlying Market Sentiment.

Repeated closing of the premium above or below fair

value suggests a sort of cumulative market
sentiment ( 3 0 or 4 0 points away from fair value on
a consistent basis is significant).

2 . Premium Sensitivity.

A second, and much more subtle use of the premium

lies in recognizing how the premium is reactirq to
day timeframe events. Depending on the behavior, a
variety of s cenarios are suggested:

a. Return to Value.

If after a program has been completed the

premium merely wanders back to fair value, then
traders are infonned that nothing has really
changed in the market.

b. Challenging the Program.

At times the premium will come close to the

levels sufficient to trigger a program, but just
not quiet close enough. This may indicate that
there may be large opposing, participants that
are taking advantage of an effort to conduct a
program.
 52

3 . Leading Value.

If the premium does not Return to Value after a

suppo s ed program has ended, then perhaps
something ha s changed. The change in market
sentiment is s till factored into the market.
This suggests that one of two things will
happen:

a. There may be another program on the way (its

pos sible to have one program right on top of
another); or

b. A longer term market move is underway. In

both cases, you need to monitor the shape of
the Market Profile* for signs of
continua tion.
 53

v. CORRECTIVE ACTION

A. An exercise in unl.ock:ing thinking and behavior.:

Please �te out answers to the following ques tions

before proceeding.

1. What do we mean when we say that the market needs to

CORRECT itself (assuming that the auction is up) ?

2. What fonns can this CORRECTIVE ACTION take ?

B. Another acceptable dictionary definition for a

correction: "COUNTERACTION". The idea that in order for
something to be corrected, an opposite action must take
place. For instance, if there has been buying, the
counteraction would be selling.

C. General Perceptions of a Correction

(AS suming an up auction)

L A situation where prices sell off and go lower after a

rally, generally closing below the previous day. Or,
profit-taking resulting in lower prices.

- or -

2. In a larger time frame s ense, a gradual sell-off

resulting in several days of lower prices .
 54

D. Other FODDS of Correction

1. Price does not neces sarily fall even though sellers

are pres ent in the market. For example, a market may
open higher and sell off all day, resulting in higher
prices , higher value and a net higher close. On such
a day (or even a day with no change in value),
correction can stila be taking place even though lower
prices are not evident.

2. Old Busines s vs. New Busines s

Correction without net change can occur because

if you make an overall asses sment of the days
trade, old buyers have taken profits (selling) while
new buyers are just decUting to enter the market.
Thus, what you have in effect is responsive selling
(old buyers taking profits) met by initiating buyers
(new buyers s till looJdng to enter the fray). Since
initiating action is stronger than responsive, it
s tands to reason that actual price may not go down- -or
may even go up- -while normal "housecleaning" of old
busines s is taking place.

3. Overbought/ Oversold

"Sometimes a market is too long to go any higher."

a. In effect, a form of counteraction: The act of

selling, of taking profits and cleaning up old
busines s , regardles s of its overall effect on price
change.

E. The Function of Corrective Acti.on

1. All ows for profit takjog--a vital ingredient in maintaining a
healthy market. Profit taking eases the anxiety level of the
market. LocJdng in a profit reduces your anxiety leveL

2. Counteraction als o serves as a test to determine the strength

of a rally (or a break).
 55

F. Example: Treasury bond market activity of August 2S-3L

Aug. 25 Aug. 26 Au g . 29 Aug. 30 Aug. 31

86 10 /32 A
13 2 o
A
86 9

A
86 8 /32

A
86 7 /32
86 6 /32
ABC
4
86 5 /32
86 /32 ABC
86 3 13 2 ABCLM
13 2 BCLM
A
86 2
CDL
o A
86 1 /32
CDEFIL
A
86 /32
13 2 CDEFHIL
A
85 31
85 30 13 2 CDEFHIJltL
85 29 /32 oc DBFGHIJltL
85 28 /32 ABC EFGHIJltL
85 27 /32 ABeJa. EFGJKL
85 26 /32 ABeJa. FGJlt
85 25 /32 BCXLM FJIt
85 24 /32 eJa. J
85 23 /32 L CDlt J
85 22 /32 L CDJJt
85 21 /32 XLM CDEJIt
85 20 /32 ltL CDEJ
85 19 /32 ltL DEFBIJ
85 18 /32 Jlt DEFBIJ
85 17 /32 Jlt FGHIJ
85 16 /32 IJIt FGHIJ
85 15 /32 IJ FGHIJ
85 14 /32 IJ FGIJ

@ 1 ?87 COG I t�C.

IJ G
I
85 13 /32
'B/VfeKe -r
li
85 12 /32
85 / 32 HI
85 10 /32 CHI
85 9 /32 CGHI
85 8 /32 ABCDEFGH
85 7 /32 ABCDEFG
85 6 /32 ABCDEFG
AB
A
85 5 /32

A
85 4 /32
85 3 /32
85 2 /32 A
A 8800
o
85 1 /32
85 /32 A
A
A
84 31 /32
84 30 /32 DJ
84 29 /32 DJlt 0
84 28 /32 DFIJKLH A
84 27 /32 CDEFGIJltL
84 26 /32 CDEFGHIltL
84 25 /32 CGHIKL
84 24 /32 CGHL
84 23 /32 CG
84 22 /32 C
84 21 /32 lt C 8400
84 20 /32 ltL C
84 19 /32 JltL C
84 18 /32 JltL OBC
84 17 /32 BJXL ABC
BCIJlt ABC
A
84 16 /32
84 15 /32 ABCDEIJ
84 14 /32 ABCDEIJ
84 13 /32 ABCDEFGHI
84 12 /32 ABEFGH
84 11 /32 AEFGH
84 10 /32 AFG
84 9 /32 AFG
84 8 /32 AF
84 7 /32

Figure 15. Trea sury bond activity of August 2 5 - 31, 19 8 8 .

Data Courtesy of Commodity Quote Graphics .
 56

Discus sion of Figure 15.

AUWls t 25: Exces s created. Exce s s which ultimately marked the beginning
of an up auction. As shown in Figure 15, this auction continued with a
break-out above a previous short tenn high of 8 5 -11.

AUWls t 30: The market opened above value and attempted to go lower most
of the ses sion (until "J" period). As prices open higher--and selling
begins - -the sellers are given ample opportunity to sell all they want.
Although lower prices are not evident, this selling is nonetheles s a
"counteraction" to what has been occurring over the past three days. The
day's value and close were actually higher than the previous day. But,
as the activity of subs equent days proved, within the sell-off of
August 3 0 was the well-disguised correction that alert buyers had been
waiting for.

Lesson: The mo st visual (i.e. obvious) clues, such as lower prices, are
not always available. Traders must recognize that price does not have
to go lower in order for a correction to take place.

The Two Purposes of Correction in the Example:

1. Higher volumes accompanying the test of the bracket top offered

by the counteraction served to validate the recent buying move.

2. This provided the confirmation and security needed--the up auction

could continue.

GOAL: To begin to see the unusual, and the extraordinary, in the ordinary.
 57

VI. COMBINING XARKE'l' LOGIC AND THE MARKET PROFILE* WI'l'H TECHNICAL
ANALYSIS - A Complementary Combination

The first s tep toward co�g some of the clas sical technical tools and
concepts occurred with the reali2ation that viewing a daily bar chart was
similar to viewing a s egmented daily Market Profile * . The difference
being that each bar repres ented one day rather than 1/ 2 hour. Using
the daily bar allows us to speed-read the longer tenn auctions.
It quickly becomes evident that one can easily scan a large number of
markets using conventional technical tools, and then use the Market
Profile * to "zoom-in" for a much more detailed analysis of the trade
facilitation proces s .
From a trading standpoint, when technical and market-generated infonnation
are used in isolation, each has its own potential drawbacks. For example,
market-generated infonnation embod[es greater subjective reasoning on the
part of the trader. This can be either an extremely powerful tool or a
hindrance, depending on the dis cipline of the trader.
Technical infonnation, being largely ba sed on price and derived from a
fonnula, will almost always be late getting in and out of a move (if using
a trend following system) or get you in way too early (if using a
stochastic type of model). When used together, however, it is pos sible
to draw on the strengths of both market-generated and technical sources.
 58

A. Harlcet Profile* /Teclmi.cal Combination 1:

Moving Averages(KA), the aSI and the Harket profile*(;KP)

In the following, we compare Market-Generated Information

(interpreted using market logic and the Market Profile* ) with two
common technical approaches , Moving Averages and the Relative
Strength Index (RSI).
Dlustrated on the next few pages is June and September S& P 5 0 0
activity over the May 3 1 to June 21, 19 8 8 period. The Market
Profiles * for each day, a s well as the daily bar (complete with
moving averages and RSI) are detailed fully. The signals generated
by each approach are s ummarized for each day. Our aim is not to
show how each approach differs, but rather to show where and when
one approach might complement the other.

L Assumptions.

The trading time frame a s sumed for this discus sion is relatively
short, similar to that of a swing trader ( 3 to 5 days). Thus, a
3 , 5 - Day Moving Average Crossover model is used to generate short
term signals. Similarly, a 5 day RSI is used for top and bottom
timing.

2. Basic Definitions .

a . 3,S-Oay Moying Average Crossover (MA) - When the 3 day moving

average (of the closing price) crosses above the 5 day moving
average, a long is signaled. Conversely, when the 3 day
moving average (of the closing price) crosses below the 5 day
moving average, a short is triggered.

b. RS.I - An RSI reading of 7 5 or greater indicates that a market

is "overbought", and therefore triggers a sell signaL An
RSI of 2 5 or les s denotes oversold conditions and generates a
buy signaL
 59

Figure 1 6. June and September S&P 5 0 0, May 31 - June 21, 19 88.

.., ll _ I' _u _ It _ u _ II _ 17 _ It
2 •.• i
2n .• I
m . .. I
m. • I
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�H 00
 60

3. Running Commentary: S&P 5 00, May 31 - June 21, 19 88

a . May 3 1, 1988

�R
MP - Buying Compos ite day . Initiat ing
break-out of overlapping value
region--buy .
MA
. . . . . . . . . . . . . . . . . 28000
- Already long from 5 / 2 4 at 2 5 6 . 00 . Excess
Add to your po s it ion .
RS I RS I reads 7 5 as of the c l ose--se l l .
RS I is always r ight--eventual ly .
Entering too early may result in
poor trade locat ion and be ing

27000
forced out of the market ( for
monetary reasons ) before the trade
can work .

b . June 1 - 7

26000
MP Value bu ilds and holds steady above
5 / 3 1 buying sp ike--cont inue to hold
long . This market has given nothing
back . · Exc ess
MA - Rever se and go short on 6 / 7 ( 3 -day
crosses below 5 day ) . 25000
RS I - Keep sel l ing . RS I continually
generates sell readings .

. .
. .
. . . . .. 75
.

. �'v:j.:I
(Jf'-.Il .
c. June 8
.
. .
. .
. . .

..: .:.... :.
• o f • •

50
. .

. .
MP - Buying Compos ite day . Initiat ing . .
. .
break-out to up s ide--hold long .
MA
25
- Reverse and go long .
RSI Keep sel l ing ( RS I 80 ) .
=

d . June 9

MP - After 6 / 8 ral ly, value overlaps

6 / 8 spike, instead of building
above it, as was the case on
5 / 3 1-6 / 1 . The buying auction may Figure 17 . Daily
be s l owing . Longs should begin to bar, 3 / 5 day MA ,
monitor for exit . and 5 day RS I .
MA - Hold long . Sept . S&P 5 00,
RS I - Keep sel l ing . 5 / 3 1 -6 / 2 1 / 8 8
 61

e . June 1 0 - 1 3

MP - Two Neutral Compos ite days--non­

convict ion . Volume decl ines con­
s istent ly . Value areas shrink .
Longs may cons ider exit ing here .
MA
�R
- Hold long .
RS I - Keep s e l l ing, RS I readings of 7 3
and 7 5.

000
f . June 1 4

MP - Gap open higher,

000

MA
RS I 82

g . June 1 5

MP Neutral Compos ite day, narrow value, .J'. . . . . . . . . . . . . . 26000

:.
l ower volume . Unab le to cha l lenge
6 / 1 4 2 8 0 . 00 excess .
be out .
A l l longs should
Enter shorts and exit i f the
excess i s taken out at 2 8 0 . 00.
:J
MA Hold long .

25000
-
RS I Sel l, RS I equals 8 3 . At last, the
. . .. ... ....
. . . . . .

c ide with MP s ignal s .

RS I oversold readings begin to coin-

I
h . June 1 6

MP - Se l l ing Compos ite day, vo lume . . . .

.. ... \' . . . . . .. . .,.,

FtJl
. . Jj
increases--ho ld short . . J ..,}

MA - Hold long . . . " .. .

.

50
RS I - P lunges from 83 to 4 8 , con f i rming
June 1 5 s e l l s igna l . . . . .
i. June 1 7 - 2 1 . ....... .. . .. ....
.
25

MP -
Three Neutral Compo s ite days . Non­
convict ion, balance . Four days of
overlapping value indicate potent ial
break-out in either direct ion .
Short s should exit and traders
should be f l at . 6 / 2 1 rally creates
potent i a l short term sel l ing excess
at 2 68 . 50 . A short term bracket F igure 1 8 . Daily
begins to form between 2 6 8 and 2 8 0 . bar, 3 / 5 day MA ,
MA - F ina l ly reverses short on 6 / 17 , two and 5 day RS I .
days l ate . Sept . S&P 5 0 0 ,
RS I - RS I leve l s off and hovers between 5 / 3 1- 6 / 2 1 / 8 8
4 5 and 6 5 , suggesting that t raders
shou ld exit shorts and stand as ide .
 62

B. Market Profile* /Techni.cal Combination n:

Evalyating A Break- Out (acceptance VB. rejection)

On August 2 , 19 8 8 , September treasury bonds broke-out above the

8 6 - 2 0 short term bracket high. Figure 19 illu strates the
subsequent day's activity. The daily bar chart for the same
period is shown in the highlighted box.
August 2 Augu st 3 August 4 August 5
.
88 0 A
87 31 AB
87 30 AB
87 29 ABKL

ABHIJKL
87 28 ABJKL
87 27
87 26 ABCFGHIJKL �hape=Non - faci li tatio n
87 25 ABCDFGHIJKLM
87 24 ABCDEFGHJKL
87 23 ACDEFGHJK
87 22 ADEFJK
87 21 ADEJK
87 20 ADEJK
87 19 ADEJ
87 18 . . A
87 17 L A A
87 16 KLM o A
87 15 KL A A

FKL
87 14 KL AG A

ADEFGHJKL
87 13 AEFGHI A
87 12 BFK o
87 11 BCFJK ABCDEFGHJKLM A
87 10 BCEFIJK ABCDEHIJKL A
87 9 BCEFHIJK ABCDHIJK A .
87 8 BCDEFGHI JK ABCIJ A o
87 7 BCDEFGHI J BCIJ A
87 6 BCDEFGHI J BCIJ A
87 5 ABCDEFG I J I AB
87 4 ABCDGJ ABCDEFG
87
87
3 ABO
· · · · · · · · · · · · · · · r · · · · · · · · · · · · · · · · · · · ·
8800
ABCDEFGH

/' 111
2 A ABCDEFGHI J
87 1 A

l}l).. 1fhjPttJl1I1
ABCDEFGH IJ
87 0 A
It) tl ABCDEFHI J

. IttltlH
86 31 A ABCEFIJ
.
86 30 A
.t ACEFJK
· ·

86 29 A AFJK
86 28 A AFJK
�
8400
86 27 A AFJK
86 26 o . . . . . �v{f. . . . ......... . . . . . . . . . . . . . . . . KLK
86 25 KL
86 24 KL
86 23 KL
86 22 KL
86 21 KL
86 20 L
11 1 118 j2S
86 19 L
86 18 11 18 \15 122 129
86 17 .
86 16 Copyright 1 9 8 4 CBOT .

Figure 19 . Rejection of a break-out. September treasury bonds,

August 2 - 5 , 19 8 8
 63

BEYOND THE R.ULES

PART 3

ANAL'YZING, IDENTIFYING AND IMPLEMENTING DAY AND SWING TRADES

L THE BIG PICTURE

It is pos sible for a highly disciplined short term trader who is experienced
in reading day time frame structure to trade and make a little money (or at
least conserve their capital), the best results are res erved for those
traders who begin with a "Top-Down" approach. The Top-Down approach begins
with an objective asse s sment of the longer term movement in the market.

A. A proper analysis of the longer teDll auction will provide us with a

better perspective a s to:

1. The Type of Market.

a. Trending

b. Bracketed

2. Potential Brackets .

a. Support

b. Resistance

3 . The Strength of the Auction.

4 . The Duration of the Major Auction.

B. Placing and Weighting The Trade

1. Place the Trade.

2. Weight the Trade.

a. Small size

b. Medium size

c. Maximum size
 64

c. Ongoing Analysis of a Developing Karket

September Treasury Bonds, February 1 - August 8, 19 8 8

#1 Exces s .

1 2 Excess - First topping action.

1 4 : 50
0= 8724
# 3 Excess - Did not take out exces s at
H= :3728
IL Low still valid.
L = :::6 1 ? · . . . . . . . .. . .
L= �:l;25 .....
. . . . . . . . . . . . . . . . . . .

6= - 1 00
1 4 Exce s s - Did not take out previous
exces s on top # 2 .

# 5 Exce s s from # 1 taken out. No longer a

secure low. We need new exces s if
buying rally is to develop.

# 6 This box represents a trading bracket

spanning from 9 0 - 0 0 to 9 3 - 0 0.

a. If bonds rally look to short

bracket top around 9 3 - 0 0.

1 \ GAP b. Since exces s has been taken out we

88
want to be short, with an exit plan
to liquidate the short if value is
fOrming at 9 0 - 0 0 or above.

84

14

Figure 20. Ongoing analysis of a developing market- -Phase 1.

 65

1 4 : 50 1 7 After a selling exhaustion gap, excess

0= 8724 is formed. Trading strategy is to
H= :�72t:
L= �:i; l :=- cover shorts and go long, with maximum
1:. = - 1 00 objective back up to 9 0 - 0 0 (the bottom
of the las t bracket, 1 6 , now becomes
the top of this new bracket). This
bracket top ( 9 0 - 0 0) should act as
resistance for at least a couple of
9 trades.

18 Trading bracket spanning from 8 8 - 0 0 to

9 0-00.
s-
19 Five days of balance o r overlapping
88 value. Trading s trategy is to go with
. . . . . - - - - - - - - - - - - . . ·'"'"-"-'-'-'--'-'-'-;,oo:;..-.�41 break-out in either direction.

'10 Exces s or bottom of bracket ( 8 8 - 0 0)

taken out. Bottom of bracket now
represents resi stance.
84

Figure 2 1. Ongoing analysis of a developing market- -Phase 2.

 66

14 50 8D'J8 CIA ! Ly e,,!

0= 8724
H= S7<:S
L= 86 1 >· .
L= �;625..,
t.= - 1 00

92 .

88

84

0 : :::72'4
H= :::728
L= :,:,;: \ :;.
c= :=:i';25F�b
•

Figure 2 2 . Ongoing analysis of a developing market--Phase 3.

#11 This is a deceptive selling trend. This market is " stair­

stepping" down- -it breaks , comes into balance, breaks again,
etc. The market is offering numerous trading opportunities and
giving traders time to act.

#12 Six days of overlapping value that finally break to the down
side. Notice that two days before the break bonds left moderate
exces s on the short term highs .
 67
14 50 B008 CIA ! L Y :�A�
0= 8724
H= :::7�:8
L= �'I; I :;'
L= �;6'::: 5 .....
1:.= - 1 00

0= :::724
H= :::72:::
L= :" ',· 1 :;'
c= ','·;·25 F "b
• !1 [,,:

Figure 2 3. Ongoing analysis of a developing market- -Phase 4.

#13 Nine days of overlapping value. Responsive buying is the

controlling activity. Trea sury bond sellers take out the long
tenn lows twice during this period, but show no continuation.
The second time down, sellers met aggres sive responsive buyers
and left moderate selling exces s in their wake. At this point
in time, the bond market is in balance. The strategy: go with a
break-out.

CautjQO; This late in the downward move, most analysts are

bearish and traders hokling short are becorrdng very complacent.
Notice how much time has pas sed since bonds established higher
value. Most traders err in that they trade the la st 3 0 percent
of a move rather than the first 7 0 percent.

#14 Gap opening. Bonds break out of balanced area to the up side.
A gap indicates that new mQney has entered the market. Entry of
new money signifies that it is early in the move. Strategy:
cover all shorts quickly and go long. Trade location is good.
 68

1 4 : 50 BDU8 DA ! LY BAR
0= 8724
H= :::728
L= f:i; 1 :;. . . .
.

L= :::625..;­
t.= - 1 00

9 ...

88

84

CI= ::: ";' 2 ...

H= ::: 7 2 :::
L = ::: ;; 1 ::.

C O P Y R I GH T 1 987 CQG I NC .

Figure 2 4. Ongoing analysis of a developing market- -Phase 5.

#15 Trend. Enter each trade and monitor for continuation. Trend
started with a gap, followed by the penetration of a previous
region of six days of overlapping value (#12). Now, with price
accepted aOOye the six day balance, the next reference point or
objective should be the bottom of the previous 8 8 - 0 0 to 9 0 - 0 0
bracket.
 BDU8 DA ! L Y E:AR
0= 8724
H= :372:::
L= :::6 1 :;' ········· . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

L= :::625",
1:.= - 1 00.

. 1 7 --- ,-------,--,

8' ............. . .

11

Figure 25. Ongoing analysis of a developing market--Phase 6 .

#16 Continuation i s evident with penetration of the 8 8 - 0 0 to 9 0 - 0 0

bracket.

#17 Bottom of the previous 9 0 - 0 0 to 9 3 - 0 0 bracket ( # 6 ) becomes the

next reference point or objective.

#18 Exces s formed near the bottom of the previous 9 0 - 0 0 to 9 3 - 0 0

bracket.

#19 New bracket formed, s�g from 8 6 - 0 0 to 9 0 - 0 0 .

 70

1 4 : 50 8DU8 DA ! LY !::AR €I 1 ?87 C(�3 ! NC .

0= 8724
H= ::;728
l= E:6 1 ? 9600
L = �:.;25"/
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

l!.= - 1 00

920(;

. 17 . ------------r-�
. r

\ 5

. . . . . . . . . . . . . . �.���A_'_'���

. 1
1 ,-, ' 1- -
.:' .,. -" -

1
1
j
• q

Figure 2 6. Ongoing analysis of a developing market--Phase 7 .

# 2 0 Market has no direction. Trade is erratic and other timeframe

participants lack sustained conviction, a s is evidenced by
probes below bracket that show no continuation, followed by re­
entry into the bracket, another disappointing probe below the
bracket, and so on. IF YOU CANNOT READ A MARKET, DO NOT TRADE.
During such times, traders tend to "over-read" the market and
end up forcing trades .
 71

D. Balanced Trading Areas

Balanced trading areas are also known as trading range s or

brackets. The concept of balanced trading areas, or trading
brackets, is difficult to communicate in a large group, namely
because the "bracket" is largely relative to � own trading
time frame. To the longest time frame trader, five days of
overlapping value (which repres ent a market in balance over the
short term) may be meaningles s . At the same time, five days of
overlapping value may represent the most valuable piece of
information available to day or swing timeframe traders.
All trends, be they short term or long term, start out as price
trends , then proceed to value trends, value area trends and finally
end when the market comes into balance.
When a market is in the balancing or stabilizing proces s , the
responsive buyers and sellers each begin to develop a comfortable
perception of value. In the largest of brackets , tho se perceptions
may vary by several points. If, over a period of time, there is
little new information entering the market, both the buyer and
seller begin to develop similar perceptions of value. At this
stage, value areas begin to overlap, volume shrinks and most
traders senses tend to dulL Watch out, markets to not stay in
balance for long. Usually, when a market moves from one of these
balance area s, the move is quick, violent and non-linear. Gaps,
spikes and trend da)ts are often the clear signal that dynamic
change is underway.

On the following two pages, Figures 2 7 and 2 8 illu strate a market

cOming into --and out of--balance.
 72

L Figure 27. represents a market coming into balance following a

shiu:p upward movement. March Japanese yen, January 19-29, 19 88.

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��"l4
" "1 DE
' DE
-7')11 DE
7 ' 8S DE
7 :QI;- DE
7'84 BD
�-Q� BCD
' 8n
-7--8 arc
' ,' 7 "D
6 B(D

�
;-74 8'T
; 1 �:: 8':::

;'68 :AB(C'
" t- :1( D
6
7 7M "
7762 "
71�11 "
'7':18 "

'.
' 7�6 Z.
" 0,4 :A
- ;')�
7-�i\
17413
7H�
7�"4
7 '-1 2
- � 411
. - ,�
--
ll'
' - 14
n"
;7)11

C o pyr i gh t 1 9 84 2 B OT .
 73

2. Figure 28. represents a marlret breaking-out of balance. June

Treasury bonds, Harch 30 - April 9, 19 87.
_ lIJ _ JI • I ., 2 ., J ., 6 ., 7 ., 1 · ,

" n ' lZ
')8 )' /)2
" lIJ 1 32
,. Z9 . 32
'8 28 32
98 27 I J1
9' 26 1)2
99 }S 32
" 24 J2
" 2l /)2
98 n 112
" 21 il2
" 10 112
99 I ') , 32
98 18 132

.. i!m-
98 17 32
• l ,

tr- ...
'8 16 /]2
• lL--

...
98 IS , 32

..,
,. 14 /)2 l
..

=t'JIJ
98 1) 112 _IJ
'*' II II

II--
12 /32 _'J
98 I I 112 II I , ..
1M 10 132 110[ lilA
,. , / 12 IIClIU. lilA Al(IiIJ
,. 8 /)2 IItOU, ... ' ....l IICDI M "rel Jll
1 1)2

B-
98 IICOlrc " ' ....l IICDI H "'tJIl
UJil

e
,. 6 112 IICDI" _ I ..a l a:D( M
'8 MCGUel lit ' ''' a:D( GIl

--
i
S 1)2
" 4 /32 ICtGIJ lilt ' " a GIl
9' J 1 12 ICGHIJ ': 1 " a Ell CD
9'I 2 /n CCl!IJ ': 1 I I IQ. CD
98 1 32 C(it04 I J CI [ I rCMI,J( " CD!
0 132 CD!

....
98 CCl!I" CI If Ef '(iH'..a l
,7 )1 1 32 CIlI4Jk CDI Efl HJ r." .. L CD!
)0 III '""- L CD! •

fIMr- R--
97 CMJk COl ['L EfJ
91 l't 1 32 COl [fCl [fJ f l JIl L a •
?t 112 •

ICD(GHI ....l
97 HJk, COM I 'GJIl [fiJill
..

Gr- ...,
91 2 1 ' }2 IIIl COIN I f e l ", U I .Ml
97 16 /32 "" COIN I C1)(GJIll rei" CHill litHe II
..

....... --
IH ZS 112 >L r ' l ,. D[fkL IIC(fC
97 24 1]2 mr- A8CDlCt4t..l'il rCH'� OU'-L" IIC('CH
97 23 132 kl OlGil AlCDGHI .a.l" QHllrt,lft IIIJ(Fl aea'GI«
97 22 / 32 kl OlC MCDHI."al IIII(f L IIIC[H I ,A
/32 U _N''-l

F--
,7 2t OUG AlCDHlkL GII lkl IIIJ(fL CltI Jll
91 2f1 /)2 -

.. ..,
III Olro GHtkl IIIIl CltIJll a:D(MIJill

..
97 " /)2 >L ore tal IIIIl "'JIll ICt)( N I ..al
ICDEQM' ....

.-
,7 1. /32 II oro *!, III MIA
Ie. CDUlMI..l, •

�
q7 17 112 'l ro I JIll
, Ie. I JI. •

.,
97 16 : 32 COlrQMI.A.
, II lI--

P-
97 15 132 Il CtrGNIL
9' 14 132 f • l ICO Il C(fOHll
97 13 32 , l fICO Il
97 12 In l fICO � AI
11 /32 , Be , ['G!, AI
,
97
l Be l AI
,
97 10 /32
97 ' ' 32 l fIC l ABC
97 B 32 l fIC "" fIC
,� l fIC l fIC
fIC
32
97 '32 fIC
97 32 fIC fIC
97 /32 B C
97 ) 1 32 B C
91 1 ! l2 C
97 1 , 32 C
91 1) ')2 C
% ) 1 ')2 C
'* )0 ' 32 CD
* =9 32 CD
C)6 28 , 32 CD
CD
CD
96 27 , 32

CD
% 26 '32
% is J2
% 2" 32 o
9fi :'J 32 [I{
% 22 32 [I{
% 2 1 32 [I{
[l{r
[l{r
% :0 ']2
% 1 , · )2
% !8 132 [I{'
9to 1 7 ' 3 2 [I{ "
% 1 6 32 [rc><
% I'; 12 E'C><
% 14 il2 rrc><
% 13 : 3 2 rC�1
% 1 2 /]2 reM I
% I I ' 32 r CM I J
% 10 / 3 2 f�IJ
9f. , ' 3 2 GHJ I
% B '32 C><JI
96 1 d 2 HJ
% 6 / 32 OJ
96 5 ']2 J
96 " 32

t---
J
96 3 1 ]2 J
96 2 'Jl
96 I 32
96 1) 1J2 J
95 ) 1 /32 J
95 30 I II J
,5 � 1)2 J
95 28 32 J
95 2i / ) 2 J
95 2tl 1 2 Jl
95 2 S , )2 J<l
95 24 '32 J<l
9S 2 3 ,']2 ,l"
,5 22 , 12 Jkl
.t.l
C opyri ght 1 9 84 c BOT .
95 21 /]2
95 zr; 'lZ J<l
9'i 1 9 /JZ .o.l
95 1 8 n Jkl
'5 ] 1 ,')2 J.l
'5 1 6 )2 Jkl
'5 1'5 12 "
''5 14 , ]2 kl
''5 I] , ) 2 >L
95 l Z /)2 "
,1Ij 11 / ) Z "
'5 1 0 :3 2 kl
,5 , / 3 Z "
9'5 8 1 2 "
,'5 7 d2 "
'l'i t. 3:' "
95 S 32 '"
1)5 • 32 "
,5 3 32 "
95 2 12 ."

..
95 I 132 kl
'5 Tl /32 •

" ) 1 ')2 ,

It )0 1 12
9. 2' , 32
'M 2. 32
94 l ' 32
� 2f. 12
� 2l) 12
 74

E . Trade Location

L Bracketed markets vs. trending markets .

2. Trade responsively.

3. Identify top and bottoms of brackets.

4. Don't expect home runs .

5. Be patient.

6 . Develop a plan if value is accepted outside the bracketed area.

 75

n. HOW DAY TIMEFRAME STRUCTURE FORMS .AND HOW TO VISUALIZE ITS

••

COMPLETION

A. Structural Information

When we refer to market structure, we are referring to the Market

Profile * graphics . The graphic allows us to:

1. Record the markets auction proces s and observe market activity

in a logical manner.

2. Visualize the developing volume area and daily range.

3 . illu strate the market's purpose.

4. Identify what the market participants are doing and who is in

controL

Important Notes;

1) Through its continuous 11 2 hour auctions , the market is

seeking a fair price to conduct busine s s for the day
time frame only.

2) What is fair for the day time frame is not neces sarily fair
for the longer timeframe.
 76

B. Dispersion Of Volume.

L Dispersion Theory and Calculation.

CHICAGO � OF TRADE UQUIDITY o,..TA BANK' REPORT

mLUME SUMMARY REPORT FOR 01129/88
Commodity - MARCH U S BONDS
.. NOTE - VOLUME FIGURES SHOWN ARE ACTUAL NUMBER OF CONTRACTS
MULTIPUED BY 2
Trade ,. Of Half Hour T1111eS AI
Price \b1ume Total Ctil,. Cti2,. Which Price Occurred

93 31132 662 0.2 58.8 0.6 L

93 30/32 6530 1.9 so. 5 18.5 LM
93 29/32 10768 3. 1 47.4 10.8 ALM
93 28132 6882 2 .0 51.7 14.9 ALM
93 Z7132 13742 3.9 54.8 13.4 AL
93 26132 10518 3.0 56.4 10.2 AIL
93 25/32 8194 2.3 55.5 15.5 AIL
93 24/32 11028 3.2 51.8 11.3 AlL
93 23/32 16530 4.7 56.4 6.5 AFGHIKL
93 22/32 34520 9.9 54.8 17.8 ADFGHlKL
93 21132 Z7690 7.9 23.6" 57.7 15.2 ADEFGHUKL
93 20/32 402'iU* 11.5 5B 16.8 ADEFGHUK
93 19/32 35164 10.0 55.4 19.5 ACDEFGHUK
93 18/32 31818 9.1 51.4 19.8 ACDEFHUK
93 17/32 25640 7.3 48.8" 56.8 18.9 ACDEFJ
93 16/32 22450 6.4 54.5 21.S ABCI
93 15132 22706 6.5 58.5 14.3 ABCJ
93 14132 13046 3.7 62.5 14.9 ABC
93 13/32 10766 3. 1 59.4 9.0 BC
88 93 12/32 1104 0.3 47.7 14.0 B

"Xl% RA.NGE 93 14/32

OF DAILY TO 253304 72 . 4 55.8 17.8 ABCDEFGHUKL
VOLUME 93 22/32
%OF TOTAL
CTI1 cm
Total Volume For MAR 88 U S BONDS 350.028 55.3
16.0
Total Volume For U S BONDS 361 ,008 55 . 1 15.7
Total Spread Volume For MAR 88 U S BONDS 1 ,704 44.6 16.2

Copynght Board of Trade o f the City o f Chicago 1 9 84 . A L L RIGHTS RESERVED.

'RegIStered trademark of the CBOT

Calculation of Dispersion of Volume Within the Value Area

I. Find the high volume price (within the value area) = 93:20
2. Sum all the "% of total" volumes above the high volume price (within the value
area).

3. Do the same for the volumes below the high volume price.
4. Either add the "high volume price" volume to each side or divide it by 2.

Total percentage volume Total percentage volume

above high vol . price: below high vol . price:

5.8·
10.0
9. 1
7.3
5 . 8· 6.4
9.9 6.5
+ 7.9 + 3.7

23.6� 48 . 8 %
• hi gh volume percentage volume divided by 2 and added to each side.

Figure 2 9.- Dispersion of volume calculation.

 77

c. Late-In-The-Day Price Trends (Spikes)

L Definition

Peter Steid.lmayer defines s;gikes as a single s eries of prices

occurring in the last one or two periods in a two-timeframe
market, or at any time in a one-timeframe market. Ba sically
spikes are price trends.

2. Trend Review

a. Price trend.

b. Value trend.

c. Value area trend.

3. The Logic of Spikes

a. Probe away from value.

b. Only time can confirm spikes (Price x Time = Value).

 78

4. Three Potential Scenarios for Opening on Day Following a Spike

"SP l k ( [)(Vt"

fl a. Opens above spike

fHI
HHI (initia tingle
H CH I
[ r CH I
[ CH I J
ECIJ
L Buying spike
[ 1 .1 bullish
0( 1
0[.11\
00'
Of ,II< 2. Selling spike
Okl
bulli sh
"sr I K ( UP""
Open Above Okl

a s pike up " or
I)Io.l
""Open Beyond " " COL

From"" a ,pike
•

down .
BCDL
""Open OPPO"le
Day Timeframe Suppon = Spike Top.
•
BCl"
b. Opens within spike
Suppon hold, lor initial probe oruy
•
BrLM

(cancelled with double TPO prints below

81 M
(nonnal, expected
•

OI M

, p i ke lOP) activity)
Bl M

S p i ke Spikc
---n-------------------------\P-
BLM

N
AM --
To p Top
N
"
M 1. Buying spike
/II' "
bullish
Open Within
NP M

MP
/II' M

NP Expected act ivity = Nonnal or neulraL

Nr

Da� Tlmeframe Suppon Level = Spike Bottom

MPO
2. Selling spike
•

MP
NP Day Timefrdm� R,:>I,Lance Level = Spike Top MNP
NP() •

• bearish
Suppon'Re,i,wn.. c hold, lor initial probe
MNP

oUblde ,pike region only

•
MIiI'
(cancdlo:d wilh
doub le TPO pronts aboo."e "N
M/II'
or below spike ) .

MN
MN
MN
c. Opens below spike
S pi ke _�Mm
N�------------------------�-- Spikc
MN M (initiating)
Butlom BIUA &mom
Open Below
Bi l l JM
BH I JM L Buying spike
8H I J l M
"Open Be�ond "' spike .lown. or bearish
From"' spike up.
•
BH I J l M ([ e"' uary 2 S )
"Open OPPO>lle a
Day Ti meframe ReSistance l.e\-el
•
BCW I Jl M ( Me' ch SI P )
OCGHJKL" • = Spike Bottom
8( [ GHJKl Res;,tance holds for 100tiai probe only 2. Selling spike
duuble TPO above
•

Be[ f GH,If\l
(cancelled with prints
BLDf f G I I< l
>plKe bottom)
bearish
BrDU C H
CO( f c. L
CO(I CK
COl K
Of

, O.c """" 16)

( ,,'" en ';&, )

Copyright 19 8 4 CBOT.

Figure 3 0 . Three potential opens on a day following a spike.

 79

5. Spikes a s Support or Resistance

6 . Expected Trading Range When Opening Within a Spike

 80

D. Openings

To some traders , the first hour or s o of trade is nothing more than

time spent watching and waiting for the initial balance to develop.
To the trained profile eye, however, the events of the first time
period contain a wealth of information regarding the conviction of
the market and its attempted direction (if any). In short, the
first five to twenty (or even thirty) minutes of trade can be
critical to establishing and confirming day and swing timeframe
reference points and trading strategy.

1. Four Types of Opens

(1) Open-Drive.

( 2 ) Open-Test-Drive.

( 3 ) Open-Rejection-Reverse.

( 4 ) Open-Auction.

( 1) (2) (3) (4)

Open Open
Open Test Re j ect ion Open
Dr ive D rive Reverse Auct ion

�T
o A A

�r �I ,
A
A
A A
A A
A A
AB AB AB ABC
AB AB AB ABC
AB AB AB AC
BC BC BC C
BC BC BC C
BC BC BC
C C C
C C C

Market
Convict ion

High Low

* "0" des ignates the open .

Figure 31. The four types of opens.

 81

,(1) Open-Drive.

a. Characteristics - Early entry.

b. Conviction

c. Free exposure

d. Announces s tructure

e. Trade entry

( 2 ) Open-Test-Drive.

a. Characteristics - Early entry.

b. Conviction

c. Free exposure

d. Announces structure
 82

( 3 ) Open-Rejection-Reverse.

a. Characteristics - Aggres sive opposite activity, not early

entry.

b. Limited conviction

c. Structure - Trading day

d. Patience and discipline

( 4 ) Open-Auction.

a. Characteristics -

b. Patience

c. Structure - Trend or neutral day

 83

2. Exceptions to Opens

January 2 0 February 2

2 49 . 40 C 2 5 7 . 40
249 . 20 CD 2 5 7 . 20 L
2 4 9 . 00 CD 2 5 7 . 00 LN
2 4 8 . 80 CD 2 5 6 . 80 KLN
2 48 . 60 BCDE 2 5 6 . 60 KLN
2 48 . 40 BDE G 2 5 6 . 40 KLN
2 48 . 2 0 BCDE FG 256. 20 o KLNP
2 4 8 . 00 BCDE FGH 2 5 6 . 00 B KLMNP
2 4 7 . 80 BCDE FGH 2 5 5 . 80 B KLMNPQ
2 4 7 . 60 B FGHI 2 5 5 . 60 B KLMNP
2 4 7 . 40 B FGHI 2 5 5 . 40 B KLMN
247 . 20 B FGHI 2 5 5 . 20 B KLMN
2 4 7 . 00 o I 2 5 5 . 00 BCG KM
2 4 6 . 80 B I 2 5 4 . 80 BCG HJKM
2 4 6 . 60 B I 2 5 4 . 60 BCFG HJKM
2 4 6 . 40 I 2 5 4 . 40 BCFG HIJK
246 . 20 I 2 54 . 20 BCF HIJ
2 4 6 . 00 I 2 5 4 . 00 BCEF HIJ
2 4 5 . 80 I 2 5 3 . 80 BCEF IJ
2 4 5 . 60 I 2 5 3 . 60 CDEF IJ
2 4 5 . 40 I 2 5 3 . 40 CDE IJ
245 . 20 I 253 . 20 CDE I
2 4 5 . 00 I 2 5 3 . 00 CD
2 4 4 . 80 I 2 5 2 . 80 C
2 4 4 . 60 I 2 5 2 . 60
2 44 . 40 IN 2 5 2 . 40
2 44 . 2 0 IMN 252 . 20
2 4 4 . 00 IMN 2 5 2 . 00
2 4 3 . 80 I LMN 2 5 1 . 80
2 4 3 . 60 ILMNPQ 2 5 1 . 60
243 . 40 IJLMNP 2 5 1 . 40
243 . 20 I JKLMNP 2 5 1 . 20
2 4 3 . 00 IJKLMNP 2 5 1 . 00
2 42 . 80 I JKLMNP 2 5 0 . 80
2 42 . 60 IJKLMNP 2 5 0 . 60
2 4 2 . 40 IJKLMNP 2 5 0 . 40
242 . 2 0 IJKLKP 2 50 . 2 0
2 4 2 . 00 IJKLKP 2 50 . 00
2 4 1 . 80 IKL 2 4 9 . 80
2 4 1 . 60 IKL 2 49 . 60
2 4 1 . 40 K 2 4 9 . 40
241 . 20 K 249 . 20
2 4 1 . 00 K 2 4 9 . 00

Short Covering Rally Texas Format ion

Long Liquidating Break

Copyright 1984 CBOT .

Figure 3 2. Exception to opens. March S & P 5 0 0, January 2 0 and

February 2 , 19 8 8. Data Courtesy of Commodity Quote
Graphics.
 84

a. Short Covering Rallie s.

1. What to look for

February 2 4 February 19 February 1 8

4400 • 94 o . 7740 •

4398 • 93 31 • 7738 •

4396 YA 93 30 • 7736 •

4394 Y ZABD D 93 29 · 7734 •

4392 Y ZABC D 93 28 D 7 7 32 ·

4390 YZABC D 93 27 DE 7 7 30 •

4388 Y ZABC DE 93 26 BDE 7728 A

4386 Y ZAB DEF 93 25 BCDE 7726 ABC
4384 YZ DEFG 93 24 BCDEF G 7724 ABCD
4382 YZ EFGH 93 23 BCEF GL 7722 ZABCD
4380 YZ EFGH 93 22 BCEF GLK 7720 ZABCD
4378 YZ EFH 93 21 BEF GL 7718 ZABD E
4376 YZ EFH 93 20 BE GL 7716 YZBD E
4374 Y EH 93 19 B GHIL 7714 YZB E
4372 Y HI 93 18 AB GHIL 7 7 12 YZB E
4370 0 HI 93 17 AB HIL 7710 YZ E
4368 · I 93 16 AB HIKL 7708 Y E
4366 IJ 93 15 A IJKL 7706 Y E
0
•

4364 • IJ 93 14 A IJKL 7704 E

4362 IJ 93 13 A JK 7702 EFGH
0
· ·

4360 • IJ 93 12 JK 7 7 00 • EFGH
4358 · IJ 93 11 . JK 7 69 8 • EFGH
4356 • IJK 93 10 • JK 7696 • FGHIJ
4354 · IJK 93 9 · JK 7 69 4 • FGHI J
4352 · I JK 93 8 • J 7 69 2 · FGHIJK
4350 • JKL 93 7 · 7 69 0 • FGHIJ
4348 • K 93 6 • 7 688 • FJ
4346 • 93 5 · 7686 •

4344 · 93 4 · 7 68 4 •

4342 · 93 3 · 7 682 ·

4340 • 93 2 · 7 680 •

COMEX Gold Treasury Bonds Japanese Yen

Copyr ight 1 9 8 4 CBOT .

Figure 3 3. Short covering rallies , in April COMEX Gold, March

Treasury bonds and March Japanese yen, 19 8 8 .
 85

2 . How to trade short covering

24 9 . 40 C C C C
249 . 20 C 0 CO CO CO
24 9 . 00 C 0 CO CO CO
248 . 80 C 0 CO CO CO
24 8 . 60 B C 0 E BCOE BCOE BCOE
248 . 40 B C 0 E BCOE BCOEG BCDEG
24 8 . 20 B C 0 E BCDE BCOEFG BCOEFG
248 . 00 B C 0 E BCDE BCOEFGH -BCOEFGH
247 . 80 B C D E BCDE BCOEFGH BCOEFGH
24 7 . 60 B B BFGH BFGHI
24 7 . 40 B B BFGH BFGHI
24 7 . 20 B B BFGH BFGHI
24 7 . 00 0 0 0 OI
24 6 . 80 B B B BI
24 6 . 6 0 B B B BI
246 . 40 I
24 6 . 20 I
24 6 . 00 I
24 5 . 80 I
24 5 . 60 I
24 5 . 4 0 I
24 5 . 20 I
24 5 . 00 I
244 . 80 I
244 . 60 I
24 4 . 40 IN
24 4 . 20 IMN
244 . 00 IMN
24 3 . 80 ILMN
243 . 60 ILMNPQ
24 3 . 40 I JLMNP
24 3 . 20 I JKLMNP
24 3 . 00 I JKLMNP
24 2 . 80 IJKLMNP
24 2 . 60 IJKLMNP
24 2 . 40 IJKLMNP
242 . 20 IJKLMP
242 . 00 I JKLMP
24 1 . 8 0 IKL
24 1 . 60 IKL
24 1 . 4 0 K
241 . 20 K
24 1 . 00 K
Copyright 1 9 8 4 CBOT.

Figure 34. Short covering in March S & P 5 0 0 , January 2 0 , 19 8 8.

 86

b. Long Liquidating Breaks -- The -Texas Formation-

L Characteristics

2. How to trade them

3. When to trade

4 . Time

5 . Running profile

2 58 . 00 · · · ·

2 5 7 . 80 · · · · · · · · ·

2 5 7 . 60
2 5 7 . 40 · · · · · ·

2 5 7 . 20 · · · · L
2 5 7 . 00 LN
2 5 6 . 80 · · · · · · · KLN
2 5 6 . 60 KLN
2 5 6 . 40 KLN
0 0
· · · · · · · · ·

256 . 20 · · · · · · KLNP
2 5 6 . 00 B · · · · · · · · B KLMNP
2 5 5 . 80 B · · · · · · · · B KLMNPQ
2 5 5 . 60 B · · · · · B KLMNP
2 5 5 . 40 B · B KLMN
255 . 20 B · · · · · · · · B KLMN
2 5 5 . 00 B C · · · G · BCG BCGKM
2 5 4 . 80 B C · · · G H · J BCGHJ BCGHJKM
2 54 . 60 B C · · F G H · J BCFGHJ BCDFGHJ
2 54 . 40 B C · · F G H I J BCFGHIJ BCDFGHI
254 . 20 B C · · F H I
· J BCFHIJ BCFH I J
2 5 4 . 00 B C · E F H I
· J BCEFHIJ BCEFHIJ
2 5 3 . 80 B C · E F · I · J BCEFIJ BCEFIJ
2 5 3 . 60 · C D E F · I · J CDEFIJ CDEFIJ
2 53 . 40 · C D E I · J CDE I J CDE IJ
253 . 20 C D E I CDEI CDE I
0
· · · · ·

2 5 3 . 00 · C · · · · · · CD CO
2 5 2 . 80 · C · C C
2 5 2 . 60 · · · · · · ·

2 5 2 . 40
2 52 . 20 · · · · · · · · ·

2 5 2 . 00 · · · · ·

Copyright 1 9 8 4 CBOT .

Figure 3 5 . The "Texa s " fonnation. Long liquidation in the March

S & P 5 0 0, February 2, 19 8 8 .
 87

, 3. The Exception to the Exception

a. Characteristics

b. What to look for

c. How to trade

7840
7838
7836
7834 J
7832 JK
7830 J
7828 IJ
7826 IJ
7824 HIJ
7822 HIJ
7820 HI
7818 H
7816 GH
7814 EFGH
7812 EFGH
7810 EFG
7 8 08 DEF
7806 DEF
7804 ZAC o
7 802 ZABC o
7 800 ZABC o
7798 ZABC
7796 Y ZABC
7 7 94 YZ
7792 YZ
7790 YZ
7788 Y
7786 Y
7784 Y
7782 Y
7780 o • Copyr ight 1 9 8 4 CBOT .

Figure 3 6 . The exception. March Japanese yen, March

7 , 19 8 8 .
 88

E. TPO's Time Price Opportunities.

1. TPO Theory.

2. Value Area Mechanic s .

93-31 L
93-30 L:-:-:-___--r
93-29 ALM
93-28 ALM
93-27 AL
9 3 -2 6 AIL 30
93-25 AIL
93-24 AIL
93-23 AFGHIKL
93-22 ADFGHIKL
93-21 ADEFGHIJKL <-- Point of Control
93-20 ADEFGHIJK
9 3 - 19 ACDEFGHIJK
93-18 ACDEFHIJK
93-17 ACDEFJ
93-16 ABCJ 47
93-15 ABCJ
93-14 ABC
93-13 BC
----"'"
9 3 - 12 B

Copyr ight 1984 CBOT .

 89

a. perfonning the TPO Count.

L Find the point of control (longest TPO price/line closest

to the center of the range) = 9 3 - 21.

2 . Sum all the TPO's above the point of controL

3 . Do the same for the TPO's below the point of controL

Total TPO ' s Above Total TPO ' s Below

Point of Control : Point of Contro l :

2 ALM* 9 ADEFGHIJK
2 ALM* 10 ACDEFGHIJK
2 AL 9 ACDEFHIJK
3 AIL 6 ACDEFJ
3 AIL 4 ABCJ
3 AIL 4 ABCJ
+ 7 AFGHIKL + 3 ABC
8 ADFGHIKL 2 BC

30 47

4 . Total End of Day TPO Count = 3 0/ 4 7

Figure 3 7 . TPO calculation for March treasury bonds , January

2 9 , 19 8 8. * "M" period designates the closing
range in treasury bonds , and is not included in
the TPO count.
 90

3. TPO's in a Developing Market Profile * .

94 8 / 32
94 7 / 32
94 6 / 32
94 5 / 32
94 4 /32 "

94 3 / 32
94 2 / 32
94 1 / 32
94 0 / 32
93 31 /3 2 L
93 30 / 32 L
93 29 / 32 A A ALM
93 28 / 32 A A AL
93 27 / 32 A A AL
93 26 / 32 A A AIL
93 25 /3 2 A A AIL
93 24 / 32 0 0 OIL 30
93 23 / 32 AF AFGH AFGHIKL
93 22 / 32 ADF ADFGH ADFGHIKL
93 21 / 32 ADEF 13 ADEFGH 21 ADEFGHIJKL <

93 20 / 32 ADEF ADEFGH ADEFGHIJK

93 19 / 32 ACDEF < ACDEFGH < ACDEFGHIJK
93 18 / 32 ACDEF ACDEFH ACDEFHIJK 47
93 17 /32 ACDEF ACDEF ACDEFJ
93 16 / 32 ABC 21 ABC 22 ABCJ
93 15 / 32 ABC ABC ABCJ
93 14 / 32 ABC ABC ABC
93 13 / 32 BC BC BC
93 12 / 32 B B B
93 11 /3 2
93 10 / 32
93 9 /3 2
93 8 / 32
Profile A Profile B Final
Pro f i le

Copyright 1984 CBOT.

Figure 3 8 . Developing and final TPO counts for March treasury

bond s , January 2 9 , 19 8 8 .
 91

4. TPO's in a Two-timeframe Harket.

December Treasury Bonds - December 1, 1986

1 0:30 1 2: 00 2 : 00
Price 9 : 30 1 0 :00

]
l
99: 1 5
lM
99: 1 4
JlM
99: 1 3 Close
99: 1 2 JlM

F
JKlM
99: 1 1
FJ K l
99: 1 0
EFGJ K l
0
9 9 : 09 E EFG
DE O E FG OEFG IJ K l
9 9 : 08
AD AOE A O E FG AOEFGIJ K L
9 9 : 07 A

t
AD AOE A O E FG AOEFG I J K L
99:06 A
ACO ACOE ACOEFGH . ACOEFG H I K L
9 9 : 05 AC
ACO ACOE ACOE G H ACOEG H I K L
99: 04 AC
ACO ACOE . AC O E H AC O E H I K L
9 9 : 03 AC
ACO ACO ACOH ACOHL
99 : 02 AC
AC ACH AC H

ABC t
99:0 1 AC AC
ABC . ABC ABCH ABCH
99:00
ABC ABC ABC ABC
98:31 ABC
ABC ABC ABC ABC
98:30 ABC
ABC ABC ABC ABC
9 8 : 29 ABC
ABC ABC ABC ABC
98:28 ABC
AB AB AB AB
98:27 AB
AB AB AB AB
98:26 AB
A A A A
98:25 A
A A A

4%5
98:24 A A

1 0/" 1 8/1 1 1 713

TPO' S 6 % 8
.
• represents the widest point or the widest point closest to the center of the range.

9 : 30 A M : Any trading below pai nt o f control (t) w i l l b u i ld additiona l buying TPO ' s . T P O ' s favor t h e

b u yer, 1 °/' 6 .

1 0 :00 A M : At the e n d o f 0 pe riod, TPO's were 1 8/' 6 , in favor of the seller.

1 0 : 30 A M : T P O ' s are now 1 %. i n favor of the buyer. H ere, E period changed t h e po i n t o f c o n t r o l .

1 2 : 00 TPO's are 1 713. buying. The profi le remained buyers for the remainder of the day. Any
Noon : trading in H period below the point of control provided another buying oppo rt u n it y . Trading
in H period below the point of control wou l d j u st add more buyers , i . e . , so m e t i m e s a
m a rket needs to break to rally.

2 : 00 PM: O n ce K period printed , the point of control could not change. Any market b r e a k wo u l d
s i m p ly add buying TPO's. T h u s , one would n o t expect a b i g break; i n fact, t h e o d d s favor
a strong close. An e a rly break i n l period provided another buying opport u n it y . Trad i n g
oppo rt u n ities favored buying below the point o f control and sel l i ng out o n ra l l i e s .

Figure 3 9 . TPO's in a two-timeframe market. Market Profile *

Graphic Copyright 19 8 4 CBOT.
 92

5. TPO's in a Trending Marlcet.

6728 · · · ·

6726
6724 Y · · · · · Y
6722 Y Z YZ
0 Z
·

6720 · B OZB
6 7 18 Y Z · B · · · · · YZB
6716 Y Z · B · · · · · Y ZAB
6 7 14 Y Z A B C · · · · · Y ZABC
6 7 12 Y Z A B C · · · · · Y ZABC
6 7 10 · Z A B C · ZABC
6708 · Z A C
· · E · · · · · · ZACE
6706 · Z · C
· · E · · · · · · ZCE
6704 · · · C
· · E · · · · · · CE
6702 · · · C
· D E · · CDE
6 7 00 · C
· D E · · CDE
6698 · C
· D E · · · · · · CDE
6696 C
· D E · CDE
6694 C D E · · CDE
6692 · · · C
· D E F · CDEF
6690 · · · C
· D · F CDF
6688 · · · C
· D · F · · · · · CDF
6686 · · · C
· D · F CDF
6684 C
· D · F G CDFG
6682 · · D · F G DFG
6 68 0 · D · F G · DFG
6678 · · · · · F G H · FGH
6676 · · · · · · · F G H · FGH
6674 · · · · · · · F G H · FGH
6672 · · · G H · GH
6670 · · G H · GH
6668 · G H · J · GHJ
6666 · · G H · J · GHJ
6664 · · · · H · J · HJ
6 6 62 · · · · H I J · HIJ
6660 · · · · · · H I J · HIJ
6658 · · · · · · · H I J · HIJ
6656 · · · · · · H I J · HIJ
6654 · H I J · HIJ
6652 · · · · · · · H I J · HIJ
6650 · · · · · · · H I J · HIJ
6 64 8 · · · · · · · · · · I J K I JK
6646 · · · · · · · · · · I J · IJ
6644 · · · · · · J · J
6642 · · · · · · · ·

6 64 0 · · · · · ·

Copyright 1 9 8 4 CBOT .

Figure 4 O. December Japanese Yen, October 21, 19 8 7 .

 93

· 6 . TPO's in a Changing Harltet.

The RlJ1l1l.in] Profile.

101-22 L L
1 0 1 -2 1 L L
101-20 L L
101-19 L L
101-18 L L
101-17 L L
101-16 L L
101-15 KL K L
101-14 KL K L
101-13 A A A AKL K L
101-12 A A A AKL K L
101-11 A A A AKL K L
1 0 1 -0 9 A A A AKL K L
10 1-08 A A A AKL K L
101-07 A A A AKL K L
101-06 A A A AKL K L
101-05 A A A AK K
10 1-04 A A A AK K
101-03 A A A AJK J K
1 0 1-02 A A A AJK J K
101-01 A A A AJ J
10 1-00 A A A AJ J
100-3 1 A A A AJ J
100-30 A AH AH AHJ H J
100-29 A AH AH AHJ H J
100-28 A AGH AGHI AGHI J G H I J
100-2 7 A AGH AFGHI AFGHIJ F G H I J
100-2 6 A AFGH AFGHI AFGHIJ F G H I J
100-2 5 AB ABFGH ABFGHI ABFGHI J F G H I J
100-24 AB ABEFG ABEFGI ABEFGI J E F G I J
100-23 AB ABEFG ABEFGI ABEFGI E F G I
100-22 BC BCEFG BCEFG BCEFG E F G
100-2 1 BCD BCDEFG BCDEFG BCDEFG D E F G
100-20 BCD BCDE BCDE BCDE D E
100-19 BCD BCDE BCDE BCDE D E
100-18 BCD BCDE BCDE BCDE D E
100-17 BCD BCD BCD BCD D
100-16 CD CD CD CD D
100-15 CD CD CD CD D
100-14 CD CD CD CD D
100-13 C C C C
100-12 C C C C

TPO ' s 8/ 18 3 4/2 1 1 7 / 44 Running Pro f i l e

Copyr ight 1 9 8 4 CBOT .

Figure 4l. March treasury bonds, January 9 , 19 8 7 .

Data Courtesy of Commodity Quote Graphics .
 94

F. Rotational Logic

L Calculating the Rotation Factor (RF).

a. Auction extreme (top or bottom) is higher = +1

b. Auction extreme (top or bottom) is same (even) = 0

c. Auction extreme (top or bottom) is lower = -1

In all, there are five pos sible rotation scenarios:

( 1) (2) (3) (4) (5)

+1 +1

o -1 o

+1 o o

-1 -1

Top-Higher Top-Higher Top-Even Top-Lower Top-Same

Bot-Higher Bot-Even Bot-Lower Bot-lower Bot-Same

Figure 4 2. Calculation of the RF.

 95

2 . Calculating the RF - - An Example

To arrive at the RF value, add the day's rotation top values , plus
the day's rotation bottom values , arriving at the Net Plus (buyers)
or Net Minus (sellers) directional RF value. Figure 4 3 illu strates
the RF calculation.

90-20 L +1
90-19 L
90-18 L
90-17 F +1 L
90-16 F H +1 K +1 L
90-15 F H K L
9 0- 1 4 F H I -1 K L
90-13 F H I K L +1
90-12 E +1 F G -1 H I J -1 K
90-11 E F G H I J K
90-10 D +1 E F +1 G H I J K
90-09 D E G H I J K
90-08 D E G -1 H 0 I 0 J K
90-07 D E J K +1
90-06 D E J
90-05 D E +1 J
90-04 D J -1
90-03 B +1 D
90-02 B C -1 D
90-01 B C D
90-00 A B C D +1
89-31 A B C
89-30 A B C
89-29 A B +1 C
89-2 8 A C -1
89-2 7 0
89-2 6 A
89-2 5 A
89-24 A
89-23 A Copyright 1 9 8 4 CBOT .

Top Tota l = +1-1+1+1+1-1+1-1-1+1+1 = +3

Bot Total = + 1- 1+ 1 + 1 + 1 - 1 - 1+0+0- 1+1+1 = +3

Overa l l RF = ( Top + Bot ) = +6

Figure 4 3 . Rotation Factors for June trea s ury bonds,

March 2 4 , 19 8 8.

the RF only indicates directional preference, Wlt trade

Caution; An imP9rtant distinction which should. be s tated is that
facilita tion.
 96

m. DOING THE TRADE

A. Philosophy

L Practical Expectations .

2. Timeframe Objectives .

3 . Pragmatic Money Management Plan.

B. Homework

L Overview.

a. Type of market

1. Trending

2 . Trading

3 . Balanced within trend

2. Direction.

a. Trend

b. Bracket

c. Balanced area

3 . Location.

a. Bracket

b. Balance area

4 . How did we get here ?

a. Straight line

b. Stair-step
 97

5 . Yesterday's Activity.

a. Value area

b. Direction

c. Volume

d. Spikes

e. Dispersion of volume analysis

f. Free exposure

6. Overnight Activity.

7 . General Market Conditions .

a. Financials

b. Metals

c. Meats and grains

d. Petroleum

e. Month end, quarter end

8. News Announcements.
 98

c. Trades You Would Like To Do (Wish List)

Do not be shy about identifying ideal trades. Due to arbitrage
opportunities are often created 6y the market.
programs and the inherent leverage of the futures market, great

1650 F
I I
I I
I I
I I
1629 F
1628 FG
1627 FG
1 62 6 FG
1625 EFG
1624 EFGH
1623 EFGH
1622 EFGH
1621 EFGH
1620 EFGH
1619 EFGH
1618 EFGH
1617 EFGH
1616 EFGHI
1615 EFGI
1614 EFGI
1613 EFGI
1612 EFI
1611 EFI
1610 EFI
1 609 DEFI
1608 DEFI
1 60 7 DEFIJL
1 60 6 DFIJL
1605 DFIJL
1 604 DJL
1603 DJL
1602 DJL
1 60 1 DJL
1 600 DJL
1599 DJL
1598 CDJL
1597 CDJL
1596 CDJL
1595 CDJKL
1594 BCDJK
1593 BCJK
1 5 92 BCKL
1591 BCKL
1590 BCKL
1589 BCKL
1588 BCKL
1587 BCK
1586 BCK
1585 BK

I
1584 K
I
I F igure 44 . September Crude Oi l , Ju ly 6 , 1988 .
I I
I I
1576 K Copyright 1984 CBOT .
 99

7660 Y
I I
I I
7 60 4 Y
7 60 2 YZ
7 600 YZ
7598 YZ
7596 Y ZA
7 5 94 Y ZA
7592 Y ZA
7590 Y ZABC
7588 YZABCD
7586 Y ZABCD L Initiating
7 5 84 Y Z BCD
7 5 82 YZBCD
7 5 80 Y Z BCD
7578 YBCD
7576 ZD
7574 ZD
7572 YDE
7570 YDE
7568 YDE
7566 YEG
7 5 64 YEG
7 5 62 YEG
7 5 60 YEFG
7 5 58 YEFG
7556 YEFG
7554 YEFG
7552 YFG
7550 YFGH
7 548 YGH 2 . Responsive
7 546 YGH
7 544 YGH
7542 YH
7540 YH
7538 YHI
7536 YHI
7534 YI
7532 YI
7 5 30 YI
7528 YI
7526 YI
7 524 YI
7522 I
7520 I
7518 I
7516 IJ
7514 IJ
I I
I I F igure 4 5 . September Japanese yen ,
7 5 00 IJ August 1 6 , 1 9 8 8 .
7498 I
7496 I
7494 I Copyright 1 9 8 4 CBOT .
 100

D. Entering The Trade.

Regardle s s of one's individual timeframe, all traders become day

traders on the day a trade is entered and exited. While it is
obvious that a day time frame trade requires favorable day timeframe
trade location, it is more difficult to appreciate the need for
good day time frame trade location for a longer term trade.
Why? Longer term traders need to continually evaluate the trade
objectively. If a los s is carried home on the first day, remaining
objective is more difficult.

L The Risk Opportunity Scale.

This scale represents a subjective as ses sment of the potential

opportunity and risk embodied in a trade, ba sed on the relationship
between the type open and the desired direction of trade. The
scale should only be used as an objective guide to help gauge trade
expectations and risk. The ratings assume good trade location and
proper trade management.

Risk/Opportunity Scale

Risk 1 -+-+-+-+-+-+-+-+-+- 1
o 5 10

opportunity 1 -+-+-+-+-+-+-+-+-+- 1
o 5 10

Low -------.� H igh

Figure 4 6 . The Risk/Opportunity scale.

2. Stra tegies .

The next few paragraphs outline the four basic opening strategies
and provide a brief description of the level of expectations, the
risk involved, what the "trader needs to see" prior to initiating
positions, guidelines for entering trades , and how to manage exit.
Each discus sion is broken down into two parts, according to the
desired direction of trade.
It is important to note that the following guide is not
comprehensive. Rather, it is intended as a "mental check-list" --a list
of the types of evaluations that should be continually processed by
day traders as a day unfolds.
 101

a. Open-Drive Strategy.

If your desire is to trade in the direction of the Open-Drive

activity: Risk= 2 Opportunity= 8

L Enter early. Trade location is not as important as is early

entry.

2 . The development of a "tail", or the Open-Drive extreme, should

serve a s the initial Structural Risk Stop, or exit point.
Structural Risk stops, or SRS's, represent price levels signifyirq
a change in market directional conviction. SRS examples may be
those prices that indicate a change from one to Owo-timeframe
trade, acceptance of value beyond a bracket, erasure of a tail or
extreme, erasure of single prints separating Owo distributions, and
so forth.

3. The market should produce preliminary one-timeframe conditions

to build early confidence in day trades.

4 . The Point of Control should move consistently in the direction

of the one-timeframe activity. The point of control is defined
as the price containing the greatest number of TPOs closest to the
center of the day's range.

5 . Monitor developing structure for indications of a potential

change in day time frame control (timeframe transition). Ideally
this evaluation should be based on time. However, time is an
intangible and subjective frame of reference. Except where
obvious, for consistency in trading (perhaps at the occasional
expense of better re sults) we suggest using the progres sion of
the half-hour auctions to identify potential time frame transition.
 102

6 . If one-timeframe conditions prevail, this day could develop

into a trend day. On trend day's the strategy is to buy or sell
the "pause", (whichever is applicable). Use the same half-hour
progres sion to establish new SRS's . Take note that the risk
increases and the potential opportunity declines with each
additional trade placed in the direction of one-timeframe
activity.

7 . Evaluate the progres sion of the half-hour auctions and adjust

Structural Risk Stops accordingly. Price levels that indicate a
potential return to two-timeframe trade should serve as the
Adjusted Structural Risk Stop (ASRS). The ASRS should be
adjusted as the day develops .

If your desire is to trade in the direction opposite the Open-Drive

activity: Risk = 8 Opportunity = 2

1. Be patient. Open-Drive buying activity suggests that you will

be offered better trade location. Such an opportunity may or
may not be pre sented on this day. Although we seek to trade
with our identified current auction, we seek to do so only when
the day auction is trading favorably to the identified current
auction. Opposing Open-Drive activity suggests that this
opportunity is low today.

2 . As trade progres ses, monitor activity around pre-selected

price levels that signify good trade location (for your desired
trade direction). Such levels might be known brackets , areas of
previous high volume or commercial pre sence, repeated responsive
activity, and so forth.

3 . Wait for price to slow. Do the half-hour auctions show a

potential return to more balanced, two-timeframe trade ?

4 . Evaluate for longer term change. If the one-timeframe

activity persists, do the auctions suggest a potential change in
the direction of the current auction (Le. has value been
accepted beyond a known bracket or other significant level) ?
 103

5 . Should trade return to a t least two-timeframe conditions (and

assuming the direction of the current auction has not changed),
begin to look for opportunities to enter po sitions better than
or near the point of controL If day structure is nonnal,
normal-variation or neutral, use the TPO count to help time
entry.

6 . The trader should have high personal conviction (or high

confidence in designated price levels) to warrant placing trades
against recent one-timeframe, open-drive activity.

7 . Trades should be entered only after evidence of strong

rejection, such a s that provided by a tail.

8 . Once a day trade is entered, identify exit points. In the

face of recent Open-Drive activity, exit trades if the extreme
serving as support or resistance is erased.

9 . Profit expectations should be small.

 104

b. Open-Test-Drive Strategy.

If your desire is to trade in the direction of the Open-Test-Drive

activity: Risk = 3 Opportunity = 7

L Enter early, ideally during the first hour and a half of trade.

2 . Trade location is important, but not criticaL Ideally, look to

locate trades as close to the open as po s sible.

3 . Initial SRS for "nimble" day traders might be the opening

range. A price return through the open indicates potential non­
conviction, and serves as a first alert to adjust strategy and
trade location. Initial SRS for more patient day traders (or a
secondary SRS for nimble traders) should be the erasure of the
"Test" extreme or tail.

4 . If the initial SRS is triggered, stand aside and wait for

better evidence of rejection before looking for opportunities to
reenter positions.

5. Early continuation and range extension are neces sary to

improve trade location and build confidence in trades.

6 . Continued one-timeframe conditions are ideal, but not to the

extent as is expected from a pure Open-Drive scenario.

7 . The point of control should move consistently in the same

direction as the day timeframe auction.

8 . Price levels that indicate a return to two-timeframe trade

should serve as the Adjusted Structural Risk Stop (ASRS).
The ASRS should be adjusted as the day develops.

If your desire is to trade in the direction opposite the Open-Test­

Drive activity: Risk = 7 Opportunity = 3

1. These guidelines are the same as those outlined in the Open­

Drive s cenario.
 105

c. Open-Rejecti.on-Reverse.

If your desire is to trade in the direction of the Open-Rejection­

Reverse strategy: Risk = 4 Opportunity = 6

L Patience and trade location are more tmportant than getting

aboard early.

2 . Two-timeframe trade is expected to develop.

3 . If day s tructure is normal, normal-variation or neutral, use

the TPO count help time trade entry.

4 . Look to place trades .in the outer third of developing value,

with the support or resistance of the Open-Rejection-Reverse
extreme.

5 . Erasure of the "Open-Rejection-Reverse" extreme is the initial

SRS.

6. If the initial SRS is triggered, stand aside and wait for

better evidence of rejection before looking for opportunities to
reenter positions .

7. The point of control is a useful day timeframe reference

point, and should remain in a relatively stable price range
throughout the ses sion.

8 . Profit expectations should be moderate, and lower than on

days exhilllting Open-Drive, Open-Test-Drive and one-time frame
trade. Look to trade the middle two thirds of developing value.
 106

If your strategy is to trade in the direction opposite the Open­

Rejection-Reverse activity: Risk = 6 Opportunity = 4

L Patience is called for here as well, but you may be afforded

an opportunity to trade today.

2 . Highlight ideal price levels at which you would like to do

business.

3 . Should trade return to at least two-timeframe conditions ,

begin to look for opportunities to enter po sitions near the
point of control (or, ideally, better than the point of control in
the outer third of developing value).

4. Once (and if) two-timeframe trade develops and a trade is

entered, use the extreme opposite the Open-Rejection-Reverse
extreme as the initial SRS.

5. If day s tructure is normal, normal-variation or neutral, use

the TPO count to help time trade entry.

6 . Look to trade the middle two thirds of developing value.

7 . If the initial SRS is triggered, stand aside and wait for

better evidence of rejection before looking for opportunities to
reenter positions.

8 . Profit expectations should be moderate.

 107

d. Open-Auction.

Regardless of the direction you desire to trade: Risk = 9

Opportunity = 1

L The market lacks directional conviction.

2 . If a relatively narrow initial balance develops, be on the

alert for the potential for a trend day.

3 . Monitor timeframe development for conviction clues.

4. The conservative s trategy is to stand aside and wait for

conviction to surface through structure.

5 . Trade location is critical.

6 . Once (and if) conviction appears, use the Open-Rejection­

Reverse guidelines to manage trades.
 108

IV. MONITORING LONGER TERM TRADES FOR CONTINUATION

A. Throw Away Exce s s Baggage.

Whdle there is a great deal o f market-generated information to help us

monitor our existing trades , none of it is of any value if you refuse
to let go of pre-existing opinions . Market-generated information is
only useful if you can s tay objective.

B. Visualize.

A s erious s�g or longer term trader wLU examdne each day very
clos ely to determine if the auction is continuing. Each day represents
a new piece of the puzzle. The faster you can visualize the completed
puzzle, the more succe s sful you wLU be.

c. Do Your Homework.

Repeat the homework steps suggested earlier. After all, exiting a

trade is still a buy or s ell decision. The same proces s used for
entering trades is equally vital to making the right decisions when
exiting trades.