DAYTRADING
Input From The Market And The Trader
Developing A Model With Auction Market Theory
by Donald L. Jones
Here's an intraday trading model that uses auction market theory.
Atenet of auction market theory is the unpredictability of the markets. An auction market model is built from market knowledge without predicting the market's path. The auction market model requires input from both the market and the trader. It is dynamic, attuned to the market, theoretically sound, and universal. It is also unique to the trader who is exercising it. I will show you the logical steps for developing a trading model, using the auction market theory presented in STOCKS & COMMODITIES earlier this year.
DEVELOPING A TRADING MODEL
An auction market model is the result of a three-step strategy development. The steps are market strategy, trader strategy, and a synthesis of the two, working strategy.
Market strategy is determined by the characteristics that define the market. Markets go through a cycle: balance (congestion) to trend (start of distribution), trend (distribution) and back to balance (start of congestion). Market strategy is concerned first with locating the market condition, or the phase of the cycle. The market may have a short time frame with a lot of action packed into minutes or even seconds, like the indexes, or it can be a longer time frame and a more sedate market, like the grains.
An auction market study reveals the market's condition at that time. A balancing, congesting market will be treated differently from one in a trend. The condition of the market is the most critical variable in developing a trading plan.
Each trader has characteristics and preferences that include time frame, risk, markets to trade, account size, and so on. These factors make up trader strategy. Market strategy is about what the market offers, placing constraints the trader must work within. By synthesizing market strategy and trader strategy, you can create a working strategy, which forms the basis of your trading model.
FIGURE 1: REFERENCE POINTS. Here are some examples of reference points and whence they can be derived.
...Continued in the November 2002 issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the November 2002 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2002, Technical Analysis, Inc.