TRADING TECHNIQUES
Pay Attention To Understand Your Market
Daytrading With Market Value
by Donald L. Jones
Markets are complex, self-regulating, and driven by feedback. The
message is clear: Decipher the feedback to understand your market.
How can you understand the market? With
feedback. What is feedback? Feedback is market response. For instance,
heavy demand leads to increased market activity; feedback is apparent as
more ticks, more volume, increased volatility, and higher prices. You already
know this, but how can you interpret this data?
Most technical indicators are not adequately coupled to the market because
markets are dynamic and changing. Decoding feedback requires a market-attuned
approach, something flexible enough to keep up with changes in the feedback
itself. An important characteristic of feedback is that it takes time to
develop a signal. A market acts, for example, and price jumps. All traders
receive the information at about the same time. You consider the new information
and then react to it in your own way at your own pace, and other traders
do the same. The sum of all traders' actions creates the total feedback
reaction to the initial market movement.
This takes time, since each trader's response time frame is different.
Ultimately, there is a new feedback message to which you and other traders
may respond. This feedback-reaction-feedback cycle continues as long as
the market trades. Average feedback response time has been measured to
be some dozens of minutes.
WHAT SHOULD YOU MEASURE?
Ticks, volume, volatility, or price all have utility, but generally,
the short-term variation of each is quite large. Value is an indirect market
measure that is defined as price over time or volume over time. Value is
the price (range) the market prefers. To find value, you must use a measurement
methodology that is consistent with the feedback response behavior. In
short, you must "decode" the feedback.
Feedback decoders have been around for 20 years. First was Market Profile,
developed by Peter Steidlmayer at the Chicago Board of Trade (CBOT), which
was then followed by Meta-Profile. Both use market input to find value.
Some quote vendors offer a product also called "Market Profile" to find
intraday value, which can be read as support and resistance, but it's not
the actual CBOT Market Profile. As with most such products, quote vendors'
"Market Profile" generally comes with little explanation; it is simply
there to be used.
This article will help you understand how the original Market Profile
and Meta-Profile can find value and how you can evaluate your findings.
However, this powerful tool has its own idiosyncrasies. This article will
also clarify the use of value in daytrading and illustrate a major potential
pitfall in its use.
...Continued in the May issue of Technical Analysis of STOCKS
& COMMODITIES
Excerpted from an article originally published in the May 2005 issue
of Technical Analysis of STOCKS & COMMODITIES magazine. All rights
reserved. © Copyright 2005, Technical Analysis, Inc.
Return to May 2005 Contents
