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First the credits:
>From "Mind over Markets" by James F. Dalton, Eric T. Jones & Robert B.
Dalton
Reprinted by Traders Press,Inc. 1993 in paperback....great low price
A few more pages were added to get the context of what Research was
referring to.
Page 60
Chapter 4
Knowledge arises from experience. Just as a musician practices diligently
to become a concert pianist and an athlete spends uncounted hours on
the court to become a great tennis player, a trader must gain experience
through actual trading to become an expert trader.
Any effective performance is a combination of knowledge, skill, and
instinct. With each trade, you put your knowledge, your understanding,
and your experience on the line to be judged by the market. Clearly, it is
necessary to "do the trade" to leam. Experience provides the confidence
to overcome such barriers as fear, hesitancy, and inflexibility.
We introduce the psychological side of trading here for good
reason. By the end of the Advanced Beginner stage you should be incor-
porating what you have learned and will continue to learn into your
trading technique. We will continue the discussion of the "You" portion
of trading once all the mechanical aspects of the Market Profile have
been covered. Remember: trading is the link to experience and
knowledge.
Section 1: Day Timeframe Trading
Mike Singletary of the Chicago Bears was the National Football League's
defensive player of the year during the 1988-89 football season. Con-
sidered by many to be the finest linebacker to play the game, Singletary's
all-pro ability transcends his physical strength and agility.
As captain of his defensive team, he attempts to, in effect, "read"
the offense. As simple as this may sound, it is a complex process that
involves both long- and short-term analysis. Singletary spends hours
preparing for each game, studying play charts, game films, and player
statistics. When the game starts, he knows exactly which plays the op-
ponent has used in every possible situation, what formations these plays
have involved, and who the key players are in each play. In other words,
Singletary has done his long-term homework and, based on the
opponent's past performances, enters each game with specific defensive
plans in mind.
After the opening kickoff, however, Mike Singletary does not active-
ly think about the charts and playbooks-he doesn't have time. It is here
that Singletary's expertise shines. The game films and technical informa-
tion are, in a sense, a holistic image in his mind. He acts intuitively,
recognizes patterns, and quickly directs the defense. His expectations
coming into the game serve as guidelines, but he actively assimilates his
play to the evolving offense.
The opposing team's offensive coach changes his strategy and com-
Page 61
Chapter 4
position of plays with every game in an attempt to throw players such as
Singletary off guard. The ability to recognize such changes in time to
stop the play is what makes an expert linebacker.
An experienced day timeframe trader and Mike Singletary follow
the same sort of evaluation process. He or she begins each day with a set
of expectations that serve as guidelines, based on the market's past per-
formance. The trader studies factors such as longer-term market direc-
tion, recent value area placement, and the opening call (all topics to be
discussed in this section). Once the market opens, the trader switches to
a more intuitive mindset, molding expectations to the developing struc-
ture, such as the opening type, the open's relationship to the previous
day's value, and the auction rotations. Like Mike Singletary, the ex-
perienced trader knows that the market will seldom develop patterns
identical to those that have happened in the past. The ability to recognize
these subtle changes as they occur in the marketplace is what makes an
expert trader.
In this section, we will study important structural reference points
in the order that they occur in the unfolding market, beginning with the
open and ending with the close.
Day Timeframe Directional Conviction
Recall for a moment the two big questions introduced at the end of
Chapter 3. The first was, "Which way is the market trying to go?" The
second was, "Is it doing a good job in its attempt to go that way?" Both
of these questions relate directly to the concept of market confidence and
directional conviction. The sole purpose behind interpreting other timeframe
activity is to find out which way the market is trying to go.
If you know which other timeframe participant is in control in the
day timeframe (or that neither is in control) and with what level of con-
fidence they have entered the market, then you can successfully answer
the two big questions and position your trade accordingly. We will now
discuss how to evaluate market confidence and directional conviction,
emphasizing their effect on estimating the day's range. We will start with
the first available measure of market sentiment, the opening call.
Opening Call During one of our advanced trading seminars, a success-
ful floor trader asked an intriguing question: "If the opening exceeds or
fails to make its opening call, can that also be considered, recordable in-
itiative or responsive activity, even though the market never actually
traded there?" The answer, as you will see, is clearly "yes."
Page 62
Chapter 4
Day timeframe trading strategy begins with the succession of early
morning calls that indicate where the market will open. Opening calls
can occur at any time-from two hours before, to just a few minutes
prior to the actual opening. Observing the succession of calls as the
market nears its open and the call closest to the opening bell is one of the
first important pieces of information available to the day timeframe
trader.
In the last few minutes before the day's actual open, the largest and
most active accounts have direct access to the trading floor through on-
floor telephone clerks. The telephone lines to these large accounts are
often left open during this period, providing continuous and almost in-
stant communication with the trading pit. As early indications of price
ranges are relayed to off-floor accounts around the world, they often at-
tract the attention of the longer timeframe traders, leading them to place
orders. As these orders are signaled into the pit, they are seen and com-
municated to other off-floor accounts, which in turn may stimulate addi-
tional orders. In a sense, the auction is actually underway before the
market opens. This pre-opening auction process, although invisible to
most, is often as important to evaluating market direction as the day's
actual trade, for it is composed almost exclusively of other timeframe
participants.
If the early call is perceived as too high or too low, opening call
price levels and the eventual opening price can change quickly. What the
astute floor trader at the seminar recognized is that the information
available before the opening is often as valuable as looking at a tail on
the Market Profile graphic. For example, if the first call is an expected
opening around 87-19, but the actual opening takes place at 87-12, there
is, in a sense, a seven-tick "hidden selling tail." That tail will be
respon-
sive or initiative depending on where it is located in relation to the pre-
vious day's value area (just like a visible tail).
The Open Experienced day timeframe traders start each trading day
with a firm knowledge of recent market activity, much like Mike
Singletary studies films and playbooks before each game. They have
done their homework and watched the opening call to develop some
idea of what to expect during the day's trading.
When the market opens, less experienced traders may wait for the
initial balance to develop, thinking that there is little information or
little
to do prior to the development of structure. Seasoned traders, however,
know that the first half hour of trade establishes one of the day's ex-
tremes in the large majority of cases. As accurate as this fact may be, it
is
of little value unless a trader can identify which extreme will hold
throughout the day. The activity occurring during the formation of the
Page 63
Chapter 4
initial balance (many times, just the first few minutes) often enables a
trader to identify which extreme has the greatest holding potential. This
knowledge alone can play a large part in forming a trader's day
timeframe strategy.
The Open as a Gauge of Market Conviction After the opening call, the first
few minutes of the open provide an excellent opportunity to observe and
evaluate the market's underlying directional conviction. With an under-
standing of market conviction, it is possible to estimate very early on
where the market is trying to go, which extreme is most likely to hold (if
any), and even what type of day will evolve. In other words, the
markets open often foreshadows the day's outcome.
Four distinct types of opening activity provide a good indication of
the level of directional conviction and which extreme is most likely to
hold throughout the day. These labels are not carved in stone, however,
and should be used only as a guideline for learning. Like the day types
discussed in Chapter 2, the importance is not in the labels but in the level
of market directional conviction that is displayed. The four types of
opens are:
1. Open-Drive
2. Open-Test-Drive
3. Open-Rejection-Reverse
4. Open-Auction
Open-Drive The strongest and most definitive type of open is the Open-
Drive. An Open-Drive is generally caused by other timeframe par-
ticipants who have made their market decisions before the opening bell.
The market opens and aggressively auctions in one direction. Fueled by
strong other timeframe activity, price never returns to trade back
through the opening range. Figure 4-1 illustrates the Open-Drive.
On April 10, copper opened above the previous day's value area
and promptly trended upward. The strong, driving activity on the part
of the buyer indicated a high level of market confidence. Figure 4-1
shows an aggressive 12-tick initiative buying tail in "A" period that ig-
nited a Double-Distribution Buying Trend day. In the majority of cases,
the extreme left behind after an Open-Drive will hold for the entire day.
The market's behavior during an Open-Drive open can be compared
to a thoroughbred racehorse just as the bell sounds and the gates swing
open. Both the market and the racehorse explode with confidence run-
ning high-their goals are obvious and their direction clear. If a trader
expects to trade such a market, he must act quickly or be left in the dust.
----- Original Message -----
From: "Research Dept." <research@xxxxxxxxxxxxx>
To: "Dan" <realtraders@xxxxxxxxxxxxxxx>
Sent: Saturday, May 05, 2001 9:28 AM
Subject: Re[2]: [RT] WHY...Trading Profession?
> Hello Dan,
>
> actually page 61-62 address this maybe there is other free information
> on the web. or maybe bob could type it up here since he also has
> the book i have to go for a while, need to wax my jet. [-)
>
> D> Part of your original question, regarding entry time of pre and post
8:30am is
> D> of interest to me. Looking at activity in NQ as early as 5 to 6am est,
one
> D> often sees a pick up in activity and the establishment or of change in
trends
> D> before the exchanges open. How do you view, handle, trade this time
period?
> D> What is the opinion of trading in the wee hours?
>
> D> Dan
>
>
> --
> Best regards,
> Research mailto:research@xxxxxxxxxxxxx
>
>
>
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