Workbook PDF

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
1
INFORMATION
L
THE LEARNING PROCESS

A.
B.
C.
D.
E.
ll.
Student
1
Observer
1
Advanced Beginne r
Decision-Maker
2
Expe rt Trader
2
THE S EARCH FOR INFORMATION

A.
B.
C.
D.
Fundamental Infonnation
3
Technical Infonnation
4
Market-Genera ted Infonna tion
5
Market-Generated vs. Technical Approaches
PART 2: THE MARKETPLACE " THE TRADE FACILITATION PROCESS

I.
ORTION OF THE MARKETPLACE

A.
B.
C.
D.
E.
F.
ll.
Revolves Around a Product

7
7
Common Participants
Behavioral Characteristics of Producers and Consumers
Behavioral Characteristics of Middlemen and Scalpers
The Need For Information
8
The Need To Promote Trade
8
THE TRADE FACATION PROCESS
A. Continuous Creation of Activity

9
B. Evaluating Longer Tenn Trade Facilitation
9
1. Volume
2 . Value Area
9
3 . Value Area Placement
10
4. Attempted Direction
10
11
5 . Old Busine s s vs. New Busines s
6 . Other Structural Signs
12
7. Dominant Activity
12
8 . Trade Facilitation Relationships
13
9. ReCOrding Longer Timeframe Infonnation
21
7
8
24
C. Market Activity
24
1. Exces s
26
2 . Timeframes
27
3 . The Auction
27
4 . Price
28
5 . Time
6 . Price vs. Time
28
7 . Behavior
29
8 . Auction Duration
30
m.
THE CONFLUENCE OF STRUCTURE, TIME AND LOGIC
A. Market Structure
33
B. Time
C. Market Logic
34
IV.
A.
B.
C.
D.
E.
F.
G.
H.
V.
VI.
32
DAY TRADING THE S & P 5 0 0 WITH THE MARKET PROFll.E *

Using Premium Levels With the Market Profile * Graphic
The Golden Rule o f S & P Trading
37
The Anticipatory Nature o f the Premium
37
S & P Spread Fundamentals
38
39
Calculating "Fair Value"
Types of Buy and Sell Programs
39
Four Stages of S & P Premium/Program Behavior 41
Trading Applications
43
43
1. Two Forms o f Risk
2 . An Example
43
3 . Expanded Commentary
45
4. "Trading the Premium" On Balanced Days
50
5. Longer Timeframe Applications
51
CORRECTIVE ACTION
A.
B.
C.
D.
E.
F.
32
37
37
53
Unlocking Thinking and Behavior

53
53
Definition
General Perceptions o f a Correction
Other Forms o f Correction
54
The Function o f Corrective Action
Example
55
53
54
COMBINING THE MARKET PROFll.E * WITH TECHNICAL ANALYSIS
A. Market Profile * /Technical Combination I

B. Market Profile * /Technical Combination n
58
62
57
PART 3: ANALY'ZING, IDEN'!UYlNG &: IMPLEMENTING DAY &: SWING TRADES

I.
THE BIG PICTURE

A.
B.
C.
D.
E.
II.
63
Properly Analyzing The Longer Term Auction

63
Placing and Weighting Trades
63
ongoing Analysis of a Developing Market
64
Balanced Trading Areas
71
74
Trade Location
HOW DAY EFRAME STRUCTURE FORMS &: HOW TO VISUALJZE IT
A. Structural Information
75
B. Dispersion of Volume
76
C. Late-In-The-Day Price Trends (Spikes)
77
77
1. Definition
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
91
4 . TPO's In a Two-timeframe Market
5 . TPO's In a Trending Market
92
6 . TPO's In a Changing Market
93
F. Rotational Logic - The RF Factor
94
m.
A.
B.
C.
D.
IV.
63
DOING THE TRADE
96
96
Philos ophy
96
Homework
98
Trade s You Would Like to Do
Entering the Trade
99
1. The Risk/Opportunity Scale
10 0
10 0
2. Strategies
a. Open-Drive Strategy
101
b. Open-Te st-Drive Strategy
10 4
c. Open-Rejection-Reverse
10 5
10 7
d. Open-Auction
MONITORING LONGER TERM TRADES FOR CONTINUATION
A. Throw Away Exces s Baggage

B. Visualize
10 8
C. Do Your Homework
10 8
10 8
10 8
75
IN"DEX
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Figure
OF
FIGURES
1. Trade facilitation relationships.

1a. Direction up, higher volume, higher value.
lb. Direction up, lower volume, higher value.
1c. Direction up, lower volume, OL lower value.
1d. Direction down, higher volume, lower value.
1e. Direction down, lower volume, OL lower value.
1. Direction down, lower volume, higher value.
2 . The long tenn activity record.
3 . The Dalton LTA.
4 . Day time frame exces s .
5 . Swing and longer time frame exces s.
6 . Two-timeframe turned one-timeframe market.
7. Anatomy of a Market Profile * .
8 . Swing auctions bounded by exces s .
9 . Longer term auctions bounded by a bracket.
10. The confluence of s tructure, time and logiC.
11. Premium Trading: December S & P 5 0 0, September 9 , 19 8 8
14. Premium Trading: December S & P 5 0 0 , September 9 , 19 8 8
15. Corrective Action: December treasury bonds .
16 . MP/Technical Combination: S & P 5 0 0, May 31 - June 21, 19 8 8 .
17 . Market Profile * /Technical Combination I;
Daily bar, 3 - 5 day moving average and Market Profile * .
1 8 . Market Profile */Technical Combination I;
Daily bar, 3 - 5 day moving average and Market Profile * .
19 . Market Profile * /Technical Combination IT;
Rejection of a break-out, Market Profile * & daily bar.
2 0 . Ongoing analysis of a developing market, Phas e 1.
21. Ongoing analysis of a developing market, Phase 2 .
2 2 . Ongoing analysis of a developing market, Pha se 3 .
2 3. Ongoing analysis o f a developing market, Phase 4 .
2 4 . Ongoing analysis of a developing market, Phase 5 .
2 5. Ongoing analysis of a developing market, Pha se 6 .
2 6 . Ongoing analysis o f a developing market, Phas e 7.
27. A market coming into balance.
2 8 . A market breaking-out of balance.
2 9 . Dispersion of volume calculation.
3 0 . Three potential opens on a day following a spike.
31. The 4 types of opens.
3 2 . Exceptions to opens.
3 3 . Short covering rally.
3 4 . How to trade short covering.
3 5 . The Texas formation.
3 6 . The exception to the exception.
3 7 . TPO calculation.
3 8 . TPO's in a developing Market Profile * .
3 9 . TPO's in a two-timeframe market.
4 O. TPO's in a trending market.
41. TPO's in a changing market.
4 2. The RF Factor.
4 3. RF factor illu strated.
4 4 . Market-created opportunities .
4 5 . Market-created opportunities .
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
P.A.R.T
RULES
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 coation 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
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
A
VB.
Technical Appro aches
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
technical coJlbinatiDn."
conplementazy market-generated/
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
PART
THE
HARKETPLACE
AND THE
RULES
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 recoe tlrls change and. (Many can
recoe 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
range.
25%
b.
Selling Composite day - Open is in the upper

range.
c.
Neutral Composite day - Open is in the middle

range.
5 . Old Busines s vs . New Busine s s
a.
Short Covering
b.
Liquidating
c.
Gaps
Breaks
of the
25%
5 0%
of the
of the
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.
VALUE TRADERS
PRICE TRADERS
Att
D..iJ:
a. up
b.
up
c. up
d. up
e. up
f. up
g. up
h. up
i. up
j. up
Figure
Longer Time frame
Day Timeframe
Relationship
Sentiment
Sentiment
Higher Volume, Higher Value

(see example pp 15)
1. Price Up
2 . Price Down
Very Strong
N/A
Lower Volume, Higher Value

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

Weakening & Slowing
Higher Volume, OL to Higher Value

1. Price Up
2. Price Down
Very strong
Weak
Moderately Strong
Could Be Balancing
Lower Volume, OL* to Higher Value

1. Price Up
2. Price Down
Strong
Weak
Slowing, Balance
Slowing, Balance
Higher Volume, Unchanged Value

1. Price Up
2. Price Down
Strong
Weak
Non-conviction, Balancing
Non-conviction, Balancing
Lower Volume, Unchanged Value

1. Price Up
2. Price Down
Strong
Weak
Slowing, Balancing
Slowing, Balancing
Higher Volume, Lower Value

1. Price Up
2. Price Down
Strong
Weak
Unclear
Unclear
Lower Volume, Lower Value

1. Price Up
2. Price Down
Non-conviction
Weak
Weak
Weak
Higher Volume, OL to Lower Value

1. Price Up
2. Price Down
Strong
Very Weak
Non-conviction
Non-conviction
Lower Volume, OL to Lower Value

(see example pp 17)
1. Price Up
2. Price Down
Strong
Weak
Weak
Weak
1.
Trade facilitation relationships.
Very Strong
N/A
OL=overlapping
14
8.
Trade Facilitation .Relationships (continued).

PRICE TRADERS
Att
JllJ:
a. Down
b . Down
c. Down
d. Down
e. Down
f.
Down
g. Down
h. Down
i. Down
j. Down
Day Timeframe
VALUE TRADERS
Longer Timeframe
Relationship
Sentiment
Sentiment
Higher volume, Lower Value

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

1. Price Up
2. Price Down
Non-convict ion
Very Weak
Strengthening, slowing
Strenghtening, Slowing
Higher Volume, OL to Lower Value

1. Price Up
2. Price Down
Strong
Very Weak
Could Be Balancing
Moderately Weak
Lower Volume, OL to Lower Value

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

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

Non-conviction; Balance
Lower Volume, Unchanged Value

1. Price Up
2. Price Down
Strong
Weak
Slowing, Balancing
Slowing, Balancing
Higher Volume, Higher Value

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

(see example pp 20)
1. Price Up
2. Price Down
Strong
Non-convict ion
Strong
Strong
Higher Volume, OL to Higher Value

1. Price Up
2. Price Down
Very Strong
Weak
Non-convict ion
Non-convict ion
Lower Volume, OL* to Higher Value

1. Price Up
2. Price Down
Strong
Weak
Strong
Strong
Figure 1 (cont.).
Trade facilitation relationships .
OL=overlapping
15
Trade Facilitation Relationships
A1::t
a.
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Volume
Price
Up
Down
Higher Value
I
I
I
I
Examples
DT
Strong
N/A
LT
strong
N/A
9000
I
I
IJ
IJ
IJ
IJ
IJJt
IJJt
IJJt
IJJt
IKL
IKL
IKL
BIKL
BIKL
BIKL
BIKL
BIKL
I
8800
HI.
It--
HI.
HI.
HI.
B
B
B
B
GB
GB
GB
DG
DG
BDFG
BDEFG
ABDEFG
ABCDEFG
ABCDEF
ABCDEF
ABCE
ABC
jlV
.
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
I
q{/
8600
, &oAr
L
L
o",
GHI.
xS&
AEGBIJKL
Figure 1a.
ABEGJK
ABEFG
ABCEFG
ABCDEF
DEF
AD
132,000
Copyright 1984
403,000
December treasury banda,

September 1-2, 1988.
Data
Courtesy ot COIIIi
IIIOd ty Quota
Graphics.
CBOT.
,/.
'/Z
8400
16
Att
Dir
b. Up
Relatjonship
4378
4376
4374
4372
4370
4368
4 3 66
4364
4 3 62
4360
4358
4356
4354
4352
4350
4348
4346
4 3 44
4342
4340
4338
4336
4334
4332
4330
4328
4326
4324
4322
4320
4318
4316
4314
4312
4310
4308
4306
4304
4302
4300
4298
4296
Volume
A
A
A
AFI
YABEFIJ
YZABEFIJ
YZABEFGIJK
YZABDEFGHIJK
YZABCDEFGHIJK
YZABCDEGHIJKL
YZACDEGHJK
YZCDEHJK
YCDHJ
YC
Y
Y
C
AC
ABC
ABC
ABC
ABC
ABCDK
ABCDFK
ABDFJKL
ADFJK
ADFJK
ADEFGJK
ADEFGIJ
AEFGHIJ
AEFGHI
AEFGHI
AFGH
ZAFG
ZAFG
Z
Z
YZ
YZ
Price
Up
Down
Examples
LT
strong Weakening
Non-con. We akeni ng
-12.'L
'"
lg7 CQ(; BJC.
o
Y
Y
Y
Y
Y
Y
5 6 , 000
Figure lb.
3 7 , 000
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
Att
Relationship
Lower
j. Up
90
90
90
90
89
89
89
89
89
89
89
89
89
89
89
89
89
89
89
89
89
89
89
89
89
89
89
89
89
89
89
89
89
89
89
89
88
88
88
88
88
88
88
88
88
88
88
3
2
1
0
31
30
29
28
27
26
25
24
23
22
21
20
19
18
17
16
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
31
30
29
28
27
26
25
24
23
22
21
Volume
L
L
L
L
L
L
L
L
L
L
L
L
L
Examples
Price
Volume, OL to Lower Value
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
KE'.:re'ilON
_
Up
Down
DT
strong
Weak
........................................
9600
....j1 .
AL
AL
ABDL
OBDL
ABCDL
g:CL.DS
ABCDEL
ABCDEFL
ABCEFL
BEFL
BFGL
BFGL
BFGHKL
FGHK
FGHK
FGHK
GHK
HJK
HIJK
HIJK
HIJ
HIJ
HIJ
HIJ
HIJ
J
J
A
A
369,000
E
DE
DE
DE
DE
DE
DEJ
DEJ
DEHJK
DEFHJK
CDEFGHJK
CDEFGHIJK
BCDEFGHIJK
BCDEFGHIJKL
BCDFGHIJKL
ABCDFGIJKL
ABFGIJKL
ABFGIJKLM
ABGL
ABGL
ABG
AB
AB
AB
OB
AB
281,000
Copyright
-.:2"1
1984 CBOT.
0/.
Figure 1c.
LT
Weak
Weak
June treasury bonds, April 14 -15, 19 8 8 .

Data Courtesy of Commodity Quote Graphics.
9';'nn
-- -
18
Trade Facilitation Relation ships - Examples
A1:t
Dir Relationship
a. Down Higher Volume, Lower Value
4170
4168
4166
4164
4162
4160
4158
4156
4154
4152
4150
4148
4146
4144
4142
4140
4138
4136
4134
4132
4130
4128
4126
4124
4122
4120
4118
4116
4 1 14
4112
4 1 10
4108
4106
4104
4102
4100
4098
4096
4094
4092
4090
Price
Up
Down
DT
N/A
Weak
nBC
OZABCDE
FIJlt
AEFIJlt
AEFIJlt
YZABCDEF
ZABDEF
ZAF
ZAF
ZABDEFGElIJ'ltL
YZABCDEFGElIJlt
OZABCDEFGB
YZABCDGB
YZCGB
YZC
YZC
FG
YZC
YZC
YZ
YZ
G
G
G
...........................................,
FG
FG
G
G
G
G
G
GJ
GJlt
GJlt
GJlt
GJXL
GJlt
GHJ
GBIJ
GBIJ
GBIJ
GBIJ
GBIJ
GBIJ
GBIJ
GBIJ
GBIJ
GIJ
4088
4086
4084
4082
4080
4078
4076
4074
4072
4070
4068
4066
GIJ
GIJ
GIJ
GIJ
IJ
IJ
IJ
J
J
Copyright 1984 CBOT.
Volume
35,000
Figure
Id.
LT
N/A
Weak
115 i22 12:;< !5
51,000
December COMEX gold, September 19 - 2 0, 19 8 8.

Data Courtesy of Commodity Quote Graphics .
4750
19
Examples

Att
Dir
d.
Down
Belati onshlp
Lower Volume, OL
27 5 . 80
27 5 .7 0
27 5 . 60
27 5 . 5 0
27 5 . 40
27 5 .30
27 5 .20
27 5 .10
27 5 . 00
274. 90
27 4. 80
27 4. 7 0
274. 60
274. 5 0
27 4. 40
274. 30
27 4. 20
27 4. 10
27 4. 00
273. 90
27 3. 80
273. 7 0
273. 60
273. 50
273. 40
273. 30
273. 20
273. 10
273. 00
272. 90
272. 80
272. 7 0
272. 60
272. 50
272. 40
272. 30
272. 20
27 2. 10
272. 00
271. 90
27 1. 80
27 1. 7 0
27 1. 60
271. 50
27 1. 40
27 1. 30
27 1. 20
Vo lume
N
NP
NP
LNP
HLNP
GHLNP
GHLMNP
GHKLMNP
EGHIKLMN
EFGHI JKLMN
EFGHIJKLMN
DEFGHI JKM
DEFGH I JKM
DEFGH I JKM
CDEFGIJKM
CDF I J
CD IJ
CDJ
BCD
BCD
BCD
BC
BC
BC
BC
BC
BC
BC
BC
BC
BC
BC
B
to
Lower Value
DT
Strong
Weak
o
B
B
B
B
B
B
B
B
B
B
B
B
BC
BC
BC
BC
BC
BC
CLM
CLMN
CFLMN
CEFGHKLMN
CEFGHKLMN
CDEFGHKLMN
CDEFGHIKLMN
CDEGHIKLMNP
DEGHIJKLMNP
DHIJKLMNP
DHIJKLNP
D I JKNP
D I JKN
DJK
DJK
JK
K
1987 CQG
LT
Slowing, Balance
Slowing, B al ance
I1C.
y/1;.: fl'l
8000
:A
1111[1 .11
H
................... 26UUU1
I
I
I
.......................... ----I
?c;nnn I
Copyright
33,000
Price
Up
Down
1984
CBOT
.;:..1=-1 ....L.:.
1 ::=-.
..; : ...c.:...
..:
8
....J..:
___---1
31,000
Figure Ie. September S&P 5 0 0 August 3- 4 , 19 8 8.

Data Courtesy of Commodity Quote Graphics.
20
Att
llir
Price
Up
Down
Relatjonsbjp
h. Down Lower Volume, Higher Value

88
88
88
88
88
88
88
88
88
88
88
88
88
88
88
88
88
88
88
88
88
88
87
87
87
87
87
87
87
87
87
87
87
87
87
87
87
87
87
87
87
21
20
19
18
17
16
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
31
30
29
28
27
26
25
24
23
22
21
20
19
18
17
16
15
14
13
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
/32
Volume
Figure 1.
L
L
L
L
L
L
L
L
L
L
L
L
KL
KL
AKL
AKL
AKL
AK
AK
AJK
AJK
AJK
AJK
ABJK
ABI J
ABCIJ
ABCI J
ABCHI J
BCHI
CHI
CEFGHI
CEFGH
COEFGH
CDEFGH
CDEFG
OEG
BC
ABC
ABC
aBCI
ABCGI
ABCOGHI
ABCOGHI
ABCOEFGHI
ABCOEFGHIK
ABCOEFGHI K
ACEFGHIK
ACEFGIJK
EFIJK
E I JK
E I JK
I JKL
I JKL
JKL
"
,;,- 'lIZ :
Examples
DT
Strong
Non-cnn.
f.:)
--
LT
strong
Strong
1."'O'7
("'CII";
;
.... I
..........._.
"
..
H H H H H. H H H H H H H
. . .'b 1
1 1)(
" "l
D
D
Copyright
189,000
9000
"t
KL
KL
KL
KL
KLM
KL
280,000
fJ(",
, ,.....
1984
CBOT.
December treasury bonds, September 9 -12, 19 8 8 .

Data Courtesy of Conunodity Quote Graphics .
jj
:::400
I
I
21
9. Recon:ting Longer Timeframe Information.
a. Factors to isolate:
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
S E
I
I
I
I
L L I N G
!RESPONSIVE
I
IVAL DIRI ( weaker )
In"'t- .... v.v
I
I
I
I
INITIATIVE
( stronger )
R
I
I
I
I
I
ivaluA ArAa
BUY I
INITIATIVE
( stronger )
i
RESPONSIVE!
I
( weaker ) IDIRIVAL
_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-
N G
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
31 - 6 9
a 30
=
=
=
BUlli s h
Neutral
Bearish
Iun
SELLI"GIBUYI"G
resI"! I I"Ires
DATE
I RO
Bu
",B8-22
ORTIT
B8-23
ITRO
BU
B8-24
B8-25 uS tOR I
ORTI
B8-26 US
ORT
",B8-29 uS
ro
B8-38 US
RO
Bu
B8-31
OR
R
89-81
t 0
RT
89-82 US
RT
ROt
B9-B6 u
ROt
RT
89-87 u
RO
Bu
t R
B9-B8
u
ORT
89-B9 uS
R
tro
",89-12 U
RO
u
t R
B9-13
0
R
u
B9-14
RT
B9-15 US
0
ORT
B
t
89-1:. U
",89-19 U
89-28 US
tro
t
47
41
71
53
32
11(
8
18
1:.
8
8
8
8
8
8
2
7
8
8
3
8
PRI
Figure 3 . The Dalton LTA.
8 88
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
7876
7874
7872
7870
7868
7866
7864
7862
7860
785 8
785 6
7854
7852
7850
7848
7846
7844
7842
7840
C
C
C
C
C
Z
C
Z
B C
Z
B C
Z
B
Z A B
Z A B
Z A B
A
A
A
Y
Y
Y
Y
Y
0
0
0
0
E
E
E
E
E
E F
E F G
E F G
F G
G
G
G
G
I
I
I
I
I
I
I
I
J
J
J
J
J
H
H
H
H
H
H
E
E
E
CE
CDEJ
CDEFIJK
YCDEFGI J
YCDEFGI J
Y ZCFGHI J
YZBCGHI
YZBCGHI
OZBGHI
ZABGHI
ZABH
ZAB
A
A
A
Copyright
Figure 4 .
Day time frame exces s.

yen, March 8, 19 8 8.
1984
CBOT .
June Japanese
25
b. Swing and longer timeframe exces s
.
0=
H=
L:::
L=
t.=
10
4417
4418
4402
4407
-2.
6C:8 DAILY BAR
1?87 CQG HlC.
4800
l
f
l
4400
el=
I 1"=
L=
t c=
'
4417
4418
4402
4407
'_"
'J.
'..JV
PYRIGHT
1987 COG
Figure 5 .
INC.
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

d i f f erent t imeframe .
Some,
such as that of the scalper on
the trading f l oor , only for sec
onds or minutes long . others are
long with many varying lengths
in between . The market's auction
process is continually searching
out a l l of these d i f ferent t ime
frames trying to entice them
into doing bus ine ss .
When a market i s rotat ing ,
looking for both buyers and
sel lers, we c a l l it a two-time
frame market .
When a market
continues in one direction it i s
referred to as a ooe-timeframe
market .
a . Rotational, Two-timeframe
Market
b . One-t ime frame Market
c . Two-timeframe turned One

t imeframe Market .
F igure
6.
Two-timeframe turned
one-t imeframe market,
June treasury bonds,
May 6, 1987 .
91
91
91
91
91
91
91
91
91
91
91
91
91
91
91
91
91
91
91
91
91
91
91
91
91
91
91
91
91
91
91
91
90
90
90
90
90
90
90
90
90
90
90
90
90
90
90
90
90
90
31
30
29
28
27
26
25
24
23
22
21
20
19
18
17
16
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
31
30
29
28
27
26
25
24
23
22
21
20
19
18
17
16
15
14
Copyright
a.
b.
C
C
C
C
CD
BCD
BCD
ABCD
ABCDFG
ABCDFGH
ABDEFGH
ABDEFGH
ABDEFGH1
ABDEFGH1
ABDEFGH1
ABDEGH1
ABEH1
ABEH1
AB1
B1
I
I
I
I
I
1JK
1JK
1JK
1JK
JK
JK
JK
JK
JK
JK
K
KL
KL
KL
KLM
KL
KL
KL
KL
KL
KL
KL
KL
K
K
1984
CBOT .
c.
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.
97-10
6.
97-09
97-08
1.
97 -07
AC
97 -06
AC
97 -05
97 -04 2.
ABCD
97 -03
ABCDGL
97 -02
ABCDGHLM
97-01
8.
ABCDGHLM
97-00
ABCDFGHLM
96-31
96-30
ADFGHIJL
ADEFGHIJL 7 .
96-29
96-28
DEFJL
96-27
DEFJL
96-26
DEFJL
96-25
DEJKL +- 9.
96-24 3.
96-23
KL
96-22
96-21
96-20
4.
96-19
96-18
Copyr ight 1984 CBOT .
2.
Init ial Balance - Act ivity

in f irst 2 time periods
Market
( for Bonds ) .
attempting to locate a
range that w i l l al low twos ided trade to t ake p l ace.
3.
Range Extension OT Sel lerActivity extending bel ow

the init ial balance.
4.
S ingle Print OT Buying

Tai l - Price advertisement
below value area accepted ,
cau s ing long term buyers
to enter on the extreme .
5.
Value Area - Where 7 0% of

the day ' s bus ines s was
The market
conducted .
ident i f ies a fair area for
the day t imeframe onl y .
:J
F igure
7.
Opening Range - I mportant

reference point for day
t imeframe traders.
5.
Anatomy o f a Market Pro f i le* ,

bonds , July 25 , 1986.
September treasury
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
b. Day Auction
Our shortest auction.
Consisting of a string of 1/2 hour auctions.
c. Swing Auctions
weeks.
Usually consisting of from 3 days to 2
13 2'
0=2,,141)
;PU8 DAILY BAR
H=.XXO
L=26100
L=2t'.2';':,/\
t.=. +lO
11..III!Jl
Q
tl
III I I
,
I
'
II
I
cD
. .
;11
:1.
'[,1
Ill!', t,I .....

I
i( [Ill
ill
. rl .
l'
115
COPYRIGHT
1S7 COG
Figure 8.
INC.
Excess
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.
0=2.;140
H=2.:60
L=26100
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COPYRIGHT
1937 COG
Figure 9 .
INC.
Longer term auctions bounded a bracket.

S & P 5 0 0 , February 15 - August 15, 19 8 8
September
32
IlL
THE CONFLUENCE OF STRUCTURE, TIME " LOOIC

L
L
L\I
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L
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KDfHlJK
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Figure 10.
The confluence of structure, time and logic.
trading effectivenes s requires a keen understanding of both the

differences and the intey among market structure, market time and market
logic.
Maximum
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 haned
,
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
marketplace. -
raw
human :i.nstllx:t
of the
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 loc 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 SREAD 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 . Exame: 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
have an obvious influence
importantly, because they
term decision-making they
of the market.
their size, they can

on the minute hand. More
are the result of longer
also impact the hour hand
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
initiating selling tail in its wake, pursues one
timeframe selling trade and touts a bearish premium-
all indications that the market is weak.
an
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 ge 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
268 . 90
268 . 80
268 . 70
268 . 60
268 . 50
268 . 40
268 . 30
268 . 20
268 . 10
268 . 00
267 . 90
267 . 80
267 . 70
267 . 60
267 . 50
267 . 40
267 . 30
267 . 20
267 . 10
267 . 00
266 . 90
266 . 80
B
>B
B
B
B
B
B
B
B
December S & P Futures
267 . 00
266 . 90
266 . 80
266 . 70
266 . 60
266 . 50
266 . 40
266 . 30
266 . 20
2 6 6 . 10
266 . 00
265 . 90
265 . 80
265 . 70
265 . 60
265 . 50
265 . 40
265 . 30
265 . 20
2 6 5 . 10
265 . 00
264 . 90
264 . 80
>B
B
B
B
B
B
B
B
B
<- 2 6 5 . 8 8
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
268. 20
268. 10
268. 00
267 . 90
267 . 80
267 . 7 0
267 . 60
267 . 5 0
267 . 40
267 . 30
267 . 20
267 . 10
267 . 00
266. 90
266. 80
266. 7 0
266. 60
266. 5 0
266. 40
266. 30
266. 20
266. 10
266. 00
2 65. 90
265 . 80
265 . 7 0
2 6 5. 60
2 65. 50
2 65 . 40
2 6 5. 30
September
B
>B
B
B
B
BC
BC
BC
BC
C
C
C
C
C
C
C
C
C
CO
CO
CO
CO
CO
0
0
0
0
0
December S&P Futures
Copyright
1984
266. 20
266. 10
266. 00
265 . 90
265. 80
265 . 7 0
265 . 60
265 . 5 0
265 . 4 0
265 . 30
265 . 20
265 . 10
265 . 00
264. 90
264. 80
264. 7 0
264. 60
264. 5 0
264. 40
264. 30
264. 20
264. 10
264. 00
263. 90
263. 80
263. 7 0
263. 60
263. 50
2 6 3. 40
263. 30
>B
B
B
B
B
B
B
B
BC
C
C
C
C
C
C
C
CO
CO
CO
0
0
0
0
0 <-
263. 64
S&P 500 Index ( Cash )
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
268. 80
268.7 0
268.60
268. 5 0
268.40
268. 30
268. 20
268.10
268. 00
267.90
267.80
267 . 7 0
267 . 60
267 . 5 0
267 .40
267 . 30
267 . 20
267 . 10
267 . 00
266.90
266. 80
266. 7 0
266. 60
266.5 0
266. 40
266. 30
266. 20
266.10
266. 00
265 . 90
265 . 80
265 . 7 0
265 . 60
265 . 50
265 . 40
265 . 30
9
266. 80
266.70
266.60
266. 5 0
266.40
266.30
266.20
266.10
266. 00
265.90
265.80
265 . 7 0
265.60
265 .50
265 . 40
265.30
265 . 20
265. 10
265.00
264. 90
264. 80
264. 7 0
264 .60
264. 5 0
264. 40
264. 30
264. 20
264. 10
264. 00
263. 90
263. 80
263. 7 0
263. 60
263. 50
263. 40
263. 30
I
I
I
I
I
I
BI
>BI
BI
BI
BI
BCI
BCI
BCI
BCI
CHI
CHI
CHI
CHI
CHI
CEHI
CEH
CEFH
CEFGH
CEFGH
CDEFGH
CDEFGH
CDEGH
CDEG
CDE
D
D
D
D
D
Copyright
1984
September
>B
BI <- 265 . 7 6
BI
BI
BI
BI
BI
BI
BCI
CI
CI
CI
CI
CHI
CEFH
CEFGH
CDEGH
CDEGH
CDE
DE
DE
D
D
D <- 263.64
S&P
500
I ndex ( Cash )
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 1.40
271. 30
271.20
27 1.10
27 1.00
27 0.90
27 0.80
27 0.7 0
27 0.60
27 0.5 0
270.40
27 0.30
27 0.20
27 0.10
27 0.00
269 . 9 0
269 . 80
269 . 7 0
26 9 . 6 0
269 . 5 0
269 . 4 0
269 . 3 0
269 . 20
269 . 1 0
269 . 00
268 . 9 0
268 . 80
268 . 7 0
268 . 60
268 . 5 0
268 . 4 0
268 . 3 0
268 . 20
268 . 1 0
268 . 00
267 . 9 0
267 . 80
267 . 7 0
267 . 60
267 . 5 0
267 . 4 0
267 . 3 0
267 . 20
267 . 1 0
267 . 00
26 6 . 9 0
266 . 80
266 . 7 0
266 . 60
266 . 5 0
266 . 40
266 . 3 0
266 . 20
26 6 . 10
266 . 00
26 5 . 9 0
265 . 80
265 . 7 0
265 . 6 0
265 . 5 0
265 . 40
265 . 30
LM
LM
LM
LM
LM
LM
LM
LM
LM
LM
LM
LM
LMN
LMN
LMN
KLN
KLN
KLN
KLNP
JKLNP
JKNP
JKNP
JKNP
JKPQ < - C lose
JKP
I JK
IJK
IJK
IJK
IK
IK
BI
>BI
BI
BI
BI
BCI
BCI
BCI
BCI
CHI
CHI
CHI
CHI
CHI
CEHI
CEH
CEFH
CEFGH
CEFGH
CDEFGH
CDEFGH
CDEGH
CDEG
CDE
D
D
D
27 0.00
269.90
269.80
269.7 0
269.60
269.50
269.40
269.30
269.20
269.10
269.00
268.90
268.80
268.7 0
268.60
268.50
268.40
268.30
268.20
268.10
268.00
267 . 9 0
267 .80
267.70
267.60
267 .5 0
267 .40
267.30
267.20
267.10
267 .00
266 . 9 0
266 . 80
266.7 0
266 . 60
266 . 5 0
26 6 . 40
266 . 30
266.20
266 . 1 0
266 . 00
265 . 90
265 . 80
265 . 7 0
265 . 60
265 .5 0
265 . 40
265.30
26 5 . 20
26 5 . 10
265 . 00
264 . 9 0
264 . 80
264.7 0
264 . 60
264 . 50
264 .40
264.30
264.20
264 . 10
264 . 00
263.90
263.80
M
M
M
M
LM <LM
LM
LM
LMN
267 .84
in " L "
LN
LN
LN
LN
LN
KLNPQ <- Close 266 . 84
KLP
KL
K
JK
JK
JK
JK
JK
>BJK
BIJK
BI
BI
BI
BI
BI
BI
CI
CI
CI
CI
CI
CHI
CFH
CEFGH
CDEGH
CDEGH
CDE
DE
DE
Copyright 1 9 8 4 CBOT .
D
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 sprad 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
'B/VfeKe -r
86
86
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86
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86
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85
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84
10
9
8
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3
2
1
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1
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25
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9
8
7
/32
13 2
/32
/32
/32
/32
/32
13 2
13 2
/32
/32
13 2
13 2
/32
/32
/32
/32
/32
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/32
/32
/32
/32
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/32
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/32
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/32
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/32
/32
Aug.
26
Au g . 29
Aug.
30
Aug.
31
A
o
A
A
A
ABC
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oc
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Figure 15. Trea sury bond activity of August 2 5 - 31, 19 8 8 .

8400
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 cog 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
June and September S&P 5 0 0, May 31
Figure 1 6.
2 .
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60
3. Running Commentary: S&P 5 00, May 31 - June 21, 19 88
a . May 3 1,
1988
MP
- Buying Compos ite day .

Initiat ing
break-out of overlapping value
region--buy .
MA
- Already long from 5 / 2 4 at 2 5 6 . 00 .
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
forced out of the market ( for
monetary reasons ) before the trade
can work .
R
. . . . . . . . . . . . . . . . . 28000
Excess
27000
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 .
MA
- Rever se and go short on 6 / 7 ( 3 -day
crosses below 5 day ) .
RS I continually
RS I - Keep sel l ing .
generates sell readings .
Exc ess
25000
. .
. . . . ..
. 'v:j.:I
.
c.
June 8
Initiat ing
- Buying Compos ite day .
break-out to up s ide--hold long .
MA
- Reverse and go long .
RSI
Keep sel l ing ( RS I
80 ) .
MP
(Jf'-.Il .
.
..:
. .
.
.:.... :.
o f
d . June 9
- 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
be s l owing .
Longs should begin to
monitor for exit .
MA
- Hold long .
RS I - Keep sel l ing .
MP
Figure 17 . Daily
bar, 3 / 5 day MA ,
and 5 day RS I .
Sept . S&P 5 00,
5 / 3 1 -6 / 2 1 / 8 8
75
50
25
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
- Hold long .
RS I - Keep s e l l ing, RS I readings of 7 3
and 7 5.
R
000
f . June 1 4
MP
Gap open higher,
000
MA
82
RS I
g . June 1 5
MP
MA
RS I
Neutral Compos ite day, narrow value,

Unab le to cha l lenge
l ower volume .
A l l longs should
6 / 1 4 2 8 0 . 00 excess .
Enter shorts and exit i f the
be out .
excess i s taken out at 2 8 0 . 00.
Hold long .
At last, the
Sel l, RS I equals 8 3 .
RS I oversold readings begin to coinc ide with MP s ignal s .
h . June 1 6
MP
- Se l l ing Compos ite day, vo lume

increases--ho ld short .
MA
- Hold long .
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
MP
.J'. . . . . . . . . . . . . .
:.
26000
:J
.
. .. ... ....
.
. . .
.. ... \'
. .
. . .
.......
. . .
25000
. . . . . .. .
.
..
.
FtJl
. . Jj
.
"
.. .
.
.. ....
.
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
begins to form between 2 6 8 and 2 8 0 .
MA
- F ina l ly reverses short on 6 / 17 , two
days l ate .
RS I - RS I leve l s off and hovers between
4 5 and 6 5 , suggesting that t raders
shou ld exit shorts and stand as ide .
F igure 1 8 . Daily
bar, 3 / 5 day MA ,
and 5 day RS I .
Sept . S&P 5 0 0 ,
5 / 3 1- 6 / 2 1 / 8 8
.,.,
J ..,}
50
25
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
88
87
87
87
87
87
87
87
87
87
87
87
87
87
87
87
87
87
87
87
87
87
87
87
87
87
87
87
87
87
87
87
87
86
86
86
86
86
86
86
86
86
86
86
86
86
86
86
86
0
31
30
29
28
27
26
25
24
23
22
21
20
19
18
17
16
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
31
30
29
28
27
26
25
24
23
22
21
20
19
18
17
16
Augu st 3
August 4
August 5
A
AB
AB
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11 1 118 j2S
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11 18 \15 122 129
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Figure 19 . Rejection of a break-out.

August 2 - 5 , 19 8 8
September treasury bonds,
63
BEYOND
THE
PART
R.ULES
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
H= :3728
L = :::6 1 ? . . . . . .
L= :l;25 .....
6= - 1 00
. . .
. . .
..
. . . . . .
. . . .
# 3 Excess - Did not take out exces s at

IL Low still valid.
. . .
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.
88
\ GAP
b. Since exces s has been taken out we

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
0= 8724
H= :72t:
L= :i; l :=-
1 7 After a selling exhaustion gap, excess

is formed. Trading strategy is to
cover shorts and go long, with maximum
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
trades.
1:. = - 1 00
88
84
s. . . . . - - - - - - - - - - - - . . '"'"-"-'-'-'--'-'-'-;,oo:;..-.41
18 Trading bracket spanning from 8 8 - 0 0 to

9 0-00.
19 Five days of balance o r overlapping
value. Trading s trategy is to go with
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.
Figure 2 1. Ongoing analysis of a developing market- -Phase 2.
66
14
0=
H=
L=
L=
t.=
50
8724
S7<:S
86 1 > .
;625..,
- 1 00
8D'J8 CIA ! Ly e,,!
92 .
88
84
0 : :::72'4
H= :::728
L= :,:,;: \ :;.
c= :=:i';25Fb
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 .
B008 CIA ! L Y :A
14 50
0= 8724
H= :::7:8
L= 'I; I :;'
L= ;6'::: 5 .....
1:.= - 1 00
67
8
0=
H=
L=
c=
Figure 2 3.
:::724
:::72:::
:" ', 1 :;'
',';25 F "b
!1
[,,:
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
BDU8 DA ! LY BAR
1 4 : 50
0=
H=
L=
L=
t.=
8724
:::728
f:i; 1 :;.
:::625..;
- 1 00
. .
.
...
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.
0= 8724
H= :372:::
L= :::6 1 :;'
BDU8 DA ! L Y E:AR
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, sg from 8 6 - 0 0 to 9 0 - 0 0 .
70
1 4 : 50
0= 8724
H= ::;728
l= E:6 1 ?
L = :.;25"/
l!.= - 1 00
8DU8
DA ! LY !::AR
1 ?87 C(3 ! NC .
9600
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
920(;
. 17
. ------------r-
. r
. . . . . . . . . . . . . . .A_'_'
1
1
,-, ' 1- .:' .,. -" -
1
1
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.
Jan'J"'Y
'Q;:2
' lW'tuar y 2f1
J8f'luary Z t
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73
2. Figure 28. represents a marlret breaking-out of balance.
Treasury bonds, Harch 30 - April 9, 19 87.
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74
E . Trade Location
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
Commodity
UQUIDITY o,..TA
mLUME SUMMARY
MARCH
.. NOTE -
OF TRADE
S BONDS
REPORT
FOR 01129/88
BANK' REPORT
VOLUME FIGURES SHOWN ARE ACTUAL NUMBER OF CONTRACTS

MULTIPUED BY 2
Trade
,. Of
Price
\b1ume
662
0.2
93 30/32
6530
1.9
93 29/32
10768
3. 1
93 28132
6882
2 .0
93 Z7132
13742
3.9
93 26132
10518
3.0
93 25/32
8194
2.3
55.5
15.5
93 24/32
11028
3.2
51.8
11.3
93 23/32
16530
4.7
56.4
6.5
93 22/32
34520
9.9
93 21132
Z7690
7.9
0.6
so. 5
47.4
51.7
23.6"
T1111eS AI
Occurred
Which Price
L
LM
18.5
10.8
ALM
14.9
ALM
54.8
13.4
AL
56.4
10.2
AIL
AIL
AlL
AFGHIKL
54.8
17.8
57.7
15.2
ADFGHlKL
ADEFGHUKL
402'iU*
11.5
5B
16.8
ADEFGHUK
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
56.8
18.9
93 16/32
22450
6.4
54.5
21.S
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
93 12/32
1104
0.3
47.7
14.0
55.8
17.8
93 19/32
"Xl%
58.8
Half Hour
Cti2,.
93 31132
93 20/32
88
Ctil,.
Total
RA.NGE
48.8"
ACDEFJ
ABCI
93 14/32
OF DAILY
TO
72 . 4
253304
ABCDEFGHUKL
93 22/32
VOLUME
%OF TOTAL
CTI1
Total
Volume
For
MAR
88
For
cm
BONDS
350.028
55.3
BONDS
361 ,008
55 . 1
15.7
S BONDS
1 ,704
44.6
16.2
16.0
Total
Volume
Total Spread Volume For MAR 88
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
2.
Total percentage volume
Total percentage volume
above high vol . price:
below high vol . price:
Figure 2 9.-
to each side or divide it by
5.8
10.0
9. 1
7.3
6.4
6.5
+ 3.7
5 . 8
9.9
7.9
23.6
hi gh volume
percentage volume divided by
48 . 8 %
2 and added to each side.
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
Time
Value).
78
4. Three Potential Scenarios for Opening on Day Following a Spike
"SP l k ( [)(Vt"
a. Opens above spike

(initia tingle
fl
fHI
HHI
H CH I
[ r CH I
[ CH I J
L Buying spike
bullish
ECIJ
"sr I K ( UP""
Open Above
S p i ke
To p
[ 1 .1
0( 1
0[.11\
00'
Of ,II<
Okl
a s pike up " or
From"" a ,pike
""Open Beyond " "

""Open OPPO"le
down .
Day Timeframe Suppon = Spike Top.

Suppon hold, lor initial probe oruy
(cancelled with double TPO prints below
, p i ke lOP)
Okl
I)Io.l
COL
BCDL
BCl"
BrLM
81 M
OI M
Bl M
AM ----n-------------------------\PN
"
N
M
/II'
NP
/II'
Nr
Open Within
NP
NP
NP()
Expected act ivity = Nonnal or neulraL

Da Tlmeframe Suppon Level = Spike Bottom
Day Timefrdm R,:>I,Lance Level = Spike Top
Suppon'Re,i,wn.. c hold, lor initial probe
oUblde ,pike region only

doub le TPO pronts aboo."e
(cancdlo:d wilh
or below spike ) .
2. Selling spike
bulli sh
BLM
Spikc
Top
"
M
M
MP
MPO
MP
MNP
MNP
MIiI'
M/II'
"N
MN
MN
MN
MN
M
S pi ke _Mm
N-------------------------- Spikc
BIUA
&mom
Butlom
Bi l l JM
Open Below
BH I JM
8H I J l M
BH I J l M
BCW I Jl M
OCGHJKL"
8( [ GHJKl
Be[ f GH,If\l
BLDf f G I I< l
BrDU C H
or
spike up.
"Open Beond "' spike .lown.

"Open OPPO>lle
Day
From"'
Ti meframe ReSistance l.e\-el
([ e"' uary 2 S )
Spike Bottom
Res;,tance holds for 100tiai probe only
(cancelled with
>plKe bottom)
duuble TPO
prints
above
b. Opens within spike

(nonnal, expected
activity)
1. Buying spike
bullish
2. Selling spike
bearish
c. Opens below spike
(initiating)
L
Buying spike
bearish
( Me' ch SI P )
2. Selling spike
bearish
CO( f c. L
CO(I CK
COl K
Of
16)
( ,,'" en ';&, )
, O.c """"
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)
Open
Test
D rive
Open
Dr ive
o
A
A
A
A
A
AB
AB
AB
BC
BC
BC
C
C
A
A
A
AB
AB
AB
BC
BC
BC
C
C
(3)
Open
Re j ect ion
Reverse
Open
Auct ion
AB
AB
AB
BC
BC
BC
C
C
ABC
ABC
AC
C
C
(4)
r I ,
Market
Convict ion
High
*
"0"
Low
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
February 2
January 2 0
2 49 . 40
249 . 20
2 4 9 . 00
2 4 8 . 80
2 48 . 60
2 48 . 40
2 48 . 2 0
2 4 8 . 00
2 4 7 . 80
2 4 7 . 60
2 4 7 . 40
247 . 20
2 4 7 . 00
2 4 6 . 80
2 4 6 . 60
2 4 6 . 40
246 . 20
2 4 6 . 00
2 4 5 . 80
2 4 5 . 60
2 4 5 . 40
245 . 20
2 4 5 . 00
2 4 4 . 80
2 4 4 . 60
2 44 . 40
2 44 . 2 0
2 4 4 . 00
2 4 3 . 80
2 4 3 . 60
243 . 40
243 . 20
2 4 3 . 00
2 42 . 80
2 42 . 60
2 4 2 . 40
242 . 2 0
2 4 2 . 00
2 4 1 . 80
2 4 1 . 60
2 4 1 . 40
241 . 20
2 4 1 . 00
C
CD
CD
CD
BCDE
BDE
BCDE
BCDE
BCDE
B
B
B
o
B
B
G
FG
FGH
FGH
FGHI
FGHI
FGHI
I
I
I
I
I
I
I
I
I
I
I
I
I
IN
IMN
IMN
I LMN
ILMNPQ
IJLMNP
I JKLMNP
IJKLMNP
I JKLMNP
IJKLMNP
IJKLMNP
IJKLKP
IJKLKP
IKL
IKL
K
K
K
Short Covering Rally
2 5 7 . 40
2 5 7 . 20
2 5 7 . 00
2 5 6 . 80
2 5 6 . 60
2 5 6 . 40
256. 20
2 5 6 . 00
2 5 5 . 80
2 5 5 . 60
2 5 5 . 40
2 5 5 . 20
2 5 5 . 00
2 5 4 . 80
2 5 4 . 60
2 5 4 . 40
2 54 . 20
2 5 4 . 00
2 5 3 . 80
2 5 3 . 60
2 5 3 . 40
253 . 20
2 5 3 . 00
2 5 2 . 80
2 5 2 . 60
2 5 2 . 40
252 . 20
2 5 2 . 00
2 5 1 . 80
2 5 1 . 60
2 5 1 . 40
2 5 1 . 20
2 5 1 . 00
2 5 0 . 80
2 5 0 . 60
2 5 0 . 40
2 50 . 2 0
2 50 . 00
2 4 9 . 80
2 49 . 60
2 4 9 . 40
249 . 20
2 4 9 . 00
L
LN
o
B
B
B
B
B
BCG
BCG
BCFG
BCFG
BCF
BCEF
BCEF
CDEF
CDE
CDE
CD
C
KLN
KLN
KLN
KLNP
KLMNP
KLMNPQ
KLMNP
KLMN
KLMN
KM
HJKM
HJKM
HIJK
HIJ
HIJ
IJ
IJ
IJ
I
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
4400
4398
4396
4394
4392
4390
4388
4386
4384
4382
4380
4378
4376
4374
4372
4370
4368
4366
4364
4362
4360
4358
4356
4354
4352
4350
4348
4346
4344
4342
4340
YA
Y ZABD
Y ZABC
YZABC
Y ZABC
Y ZAB
YZ
YZ
YZ
YZ
YZ
Y
Y
COMEX Gold
D
D
D
DE
DEF
DEFG
EFGH
EFGH
EFH
EFH
EH
HI
HI
I
IJ
IJ
IJ
IJ
IJ
IJK
IJK
I JK
JKL
K
February 1 8
February 19
February 2 4
94
93
93
93
93
93
93
93
93
93
93
93
93
93
93
93
93
93
93
93
93
93
93
93
93
93
93
93
93
93
93
o
31
30
29
28
27
26
25
24
23
22
21
20
19
18
17
16
15
14
13
12
11
10
9
8
7
6
5
4
3
2
D
DE
BDE
BCDE
BCDEF
BCEF
BCEF
BEF
BE
B
AB
AB
AB
A
A
A
0
G
GL
GLK
GL
GL
GHIL
GHIL
HIL
HIKL
IJKL
IJKL
JK
JK
JK
JK
JK
J
Treasury Bonds
7740
7738
7736
7734
7 7 32
7 7 30
7728
7726
7724
7722
7720
7718
7716
7714
7 7 12
7710
7708
7706
7704
7702
7 7 00
7 69 8
7696
7 69 4
7 69 2
7 69 0
7 688
7686
7 68 4
7 682
7 680
A
ABC
ABCD
ZABCD
ZABCD
ZABD
YZBD
YZB
YZB
YZ
Y
Y
E
E
E
E
E
E
E
E
EFGH
EFGH
EFGH
FGHIJ
FGHI J
FGHIJK
FGHIJ
FJ
Japanese Yen
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
249 . 20
24 9 . 00
248 . 80
24 8 . 60
248 . 40
24 8 . 20
248 . 00
247 . 80
24 7 . 60
24 7 . 40
24 7 . 20
24 7 . 00
24 6 . 80
24 6 . 6 0
246 . 40
24 6 . 20
24 6 . 00
24 5 . 80
24 5 . 60
24 5 . 4 0
24 5 . 20
24 5 . 00
244 . 80
244 . 60
24 4 . 40
24 4 . 20
244 . 00
24 3 . 80
243 . 60
24 3 . 40
24 3 . 20
24 3 . 00
24 2 . 80
24 2 . 60
24 2 . 40
242 . 20
242 . 00
24 1 . 8 0
24 1 . 60
24 1 . 4 0
241 . 20
24 1 . 00
B
B
B
B
B
B
B
B
B
B
C
C
C
C
C
C
C
C
C
0
0
0
0
0
0
0
D
E
E
E
E
E
C
CO
CO
CO
BCOE
BCOE
BCDE
BCDE
BCDE
B
B
B
B
B
34.
Short covering
B
B
Copyright 1 9 8 4 CBOT.
Figure
C
CO
CO
CO
BCOE
BCOEG
BCOEFG
BCOEFGH
BCOEFGH
BFGH
BFGH
BFGH
in
C
CO
CO
CO
BCOE
BCDEG
BCOEFG
-BCOEFGH
BCOEFGH
BFGHI
BFGHI
BFGHI
OI
BI
BI
I
I
I
I
I
I
I
I
I
I
IN
IMN
IMN
ILMN
ILMNPQ
I JLMNP
I JKLMNP
I JKLMNP
IJKLMNP
IJKLMNP
IJKLMNP
IJKLMP
I JKLMP
IKL
IKL
K
K
K
March S & P
5 0 0 , January 2 0 , 19 8 8.
86
b.
Long Liquidating Breaks

L
--
The -Texas Formation-
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
2 5 7 . 00
2 5 6 . 80
2 5 6 . 60
2 5 6 . 40
256 . 20
2 5 6 . 00
2 5 5 . 80
2 5 5 . 60
2 5 5 . 40
255 . 20
2 5 5 . 00
2 5 4 . 80
2 54 . 60
2 54 . 40
254 . 20
2 5 4 . 00
2 5 3 . 80
2 5 3 . 60
2 53 . 40
253 . 20
2 5 3 . 00
2 5 2 . 80
2 5 2 . 60
2 5 2 . 40
2 52 . 20
2 5 2 . 00
B
B
B
B
B
B
B
B
B
B
B
B
C
C
C
C
C
C
C
C
C
C
C
C
E
E
D E
D E
D E
G
G H
F G H
F G H I
H I
F
F
H I
F
I
F
I
I
I
J
J
J
J
J
J
J
J
B
B
B
B
B
BCG
BCGHJ
BCFGHJ
BCFGHIJ
BCFHIJ
BCEFHIJ
BCEFIJ
CDEFIJ
CDE I J
CDEI
CD
C
L
LN
KLN
KLN
KLN
KLNP
KLMNP
KLMNPQ
KLMNP
KLMN
KLMN
BCGKM
BCGHJKM
BCDFGHJ
BCDFGHI
BCFH I J
BCEFHIJ
BCEFIJ
CDEFIJ
CDE IJ
CDE I
CO
C
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
7832
7830
7828
7826
7824
7822
7820
7818
7816
7814
7812
7810
7 8 08
7806
7804
7 802
7 800
7798
7796
7 7 94
7792
7790
7788
7786
7784
7782
7780
ZAC
ZABC
ZABC
ZABC
Y ZABC
YZ
YZ
YZ
Y
Y
Y
Y
J
JK
J
IJ
IJ
HIJ
HIJ
HI
H
GH
EFGH
EFGH
EFG
DEF
DEF
o
o
o
Figure 3 6 . The exception.

7 , 19 8 8 .
March Japanese yen, March
88
E. TPO's Time Price Opportunities.
1. TPO Theory.
2. Value Area Mechanic s .
93-31
93-30
93-29
93-28
93-27
9 3 -2 6
93-25
93-24
93-23
93-22
93-21
93-20
9 3 - 19
93-18
93-17
93-16
93-15
93-14
93-13
9 3 - 12
L
L:-:-:-___--r
ALM
ALM
AL
AIL
AIL
AIL
AFGHIKL
ADFGHIKL
ADEFGHIJKL
ADEFGHIJK
ACDEFGHIJK
ACDEFHIJK
ACDEFJ
ABCJ
ABCJ
ABC
BC
----"'"
B
30
<-- Point of Control
47
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

Point of Control :
2
2
2
3
3
3
7
8
30
ALM*
ALM*
AL
AIL
AIL
AIL
AFGHIKL
ADFGHIKL
Total TPO ' s Below

Point of Contro l :
9
10
9
6
4
4
3
+
2
ADEFGHIJK
ACDEFGHIJK
ACDEFHIJK
ACDEFJ
ABCJ
ABCJ
ABC
BC
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
94
94
94
94
94
94
94
94
93
93
93
93
93
93
93
93
93
93
93
93
93
93
93
93
93
93
93
93
93
93
93
93
8
7
6
5
4
3
2
1
0
31
30
29
28
27
26
25
24
23
22
21
20
19
18
17
16
15
14
13
12
11
10
9
8
/ 32
/ 32
/ 32
/ 32
/32
/ 32
/ 32
/ 32
/ 32
/3 2
/ 32
/ 32
/ 32
/ 32
/ 32
/3 2
/ 32
/ 32
/ 32
/ 32
/ 32
/ 32
/ 32
/32
/ 32
/ 32
/ 32
/ 32
/ 32
/3 2
/ 32
/3 2
/ 32
"
L
L
AIL
AIL
AF
ADF
ADEF
ADEF
ACDEF
ACDEF
ACDEF
ABC
ABC
ABC
BC
B
ALM
AL
AL
A
A
A
A
A
A
A
A
A
A
13
<
21
Profile A
AFGH
ADFGH
ADEFGH
ADEFGH
ACDEFGH
ACDEFH
ACDEF
ABC
ABC
ABC
BC
B
30
OIL
21
<
Profile B
22
AFGHIKL
ADFGHIKL
ADEFGHIJKL
ADEFGHIJK
ACDEFGHIJK
ACDEFHIJK
ACDEFJ
ABCJ
ABCJ
ABC
BC
B
<
47
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

1 0 :00
9 : 30
Price
1 0:30
December 1, 1986
2 : 00
1 2: 00
l
lM
99: 1 5
99: 1 4
99: 1 3
99: 1 2
99: 1 1
99: 1 0
JlM
JlM
JKlM
FJ K l
EFG
O E FG
A O E FG
A O E FG
ACOEFGH .
ACOE G H
Close
EFGJ K l
OEFG IJ K l
AOEFGIJ K L
AOEFG I J K L
ACOEFG H I K L
ACOEG H I K L
AD
AD
ACO
ACO
E
DE
AOE
AOE
ACOE
ACOE
ACO
ACO
ACOE .
ACO
AC O E H
ACOH
AC O E H I K L
ACOHL
ABC t
ABC
ABC
AC
ABC .
ABC
ABC
AC
ABC
ABC
ABC
ACH
ABCH
ABC
ABC
ABCH
ABC
ABC
ABC
ABC
AB
AB
A
A
ABC
98:26
98:25
98:24
ABC
ABC
AB
AB
A
A
ABC
AB
AB
A
A
ABC
ABC
AB
AB
A
A
ABC
ABC
AB
AB
A
A
TPO' S
1 0/"
1 8/1
1 713
9 9 : 09
9 9 : 08
9 9 : 07
99:06
9 9 : 05
99: 04
A
A
AC
AC
AC
9 9 : 03
99 : 02
99:0 1
AC
AC
99:00
98:31
98:30
9 8 : 29
98:28
98:27
AC H
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

b u yer, 1 /' 6 .
4%5
(t) w i l l b u i ld additiona l buying TPO ' s .
T P O ' s favor t h e
0 pe riod, TPO's were 1 8/' 6 , in favor of the seller.
1 0 :00 A M :
At the e n d o f
1 0 : 30 A M :
T P O ' s are now
1 2 : 00
Noon :
TPO's are 1 713. buying. The profi le remained buyers for the remainder of the day. Any
trading in H period below the point of control provided another buying oppo rt u n it y . Trading
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 .
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.

Graphic Copyright 19 8 4 CBOT.
Market Profile *
92
5. TPO's in a Trending Marlcet.
6728
6726
6724
6722
6720
6 7 18
6716
6 7 14
6 7 12
6 7 10
6708
6706
6704
6702
6 7 00
6698
6696
6694
6692
6690
6688
6686
6684
6682
6 68 0
6678
6676
6674
6672
6670
6668
6666
6664
6 6 62
6660
6658
6656
6654
6652
6650
6 64 8
6646
6644
6642
6 64 0
Y
Y Z
0 Z
Y Z
Y Z
Y Z
Y Z
Z
Z
Z
B
B
B
A B C
A B C
A B C
C
A
C
C
C
C
C
C
C
C
C
C
C
C
D
D
D
D
D
D
D
D
D
D
D
D
E
E
E
E
E
E
E
E
E F
F
F
F
F
F
F
F
F
F
G
G
G
G
G
G
G
G
G
G
H
H
H
H
H
H
H
H
H
H
H
H
H
H
H
I
I
I
I
I
I
I
I
I
J
J
J
J
J
J
J
J
J
J
J K
J
J
Y
YZ
OZB
YZB
Y ZAB
Y ZABC
Y ZABC
ZABC
ZACE
ZCE
CE
CDE
CDE
CDE
CDE
CDE
CDEF
CDF
CDF
CDF
CDFG
DFG
DFG
FGH
FGH
FGH
GH
GH
GHJ
GHJ
HJ
HIJ
HIJ
HIJ
HIJ
HIJ
HIJ
HIJ
I JK
IJ
J
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
1 0 1 -2 1
101-20
101-19
101-18
101-17
101-16
101-15
101-14
101-13
101-12
101-11
1 0 1 -0 9
10 1-08
101-07
101-06
101-05
10 1-04
101-03
1 0 1-02
101-01
10 1-00
100-3 1
100-30
100-29
100-28
100-2 7
100-2 6
100-2 5
100-24
100-23
100-22
100-2 1
100-20
100-19
100-18
100-17
100-16
100-15
100-14
100-13
100-12
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
AB
AB
AB
BC
BCD
BCD
BCD
BCD
BCD
CD
CD
CD
C
C
A
A
A
A
A
A
A
A
A
A
A
A
A
A
AH
AH
AGH
AGH
AFGH
ABFGH
ABEFG
ABEFG
BCEFG
BCDEFG
BCDE
BCDE
BCDE
BCD
CD
CD
CD
C
C
A
A
A
A
A
A
A
A
A
A
A
A
A
A
AH
AH
AGHI
AFGHI
AFGHI
ABFGHI
ABEFGI
ABEFGI
BCEFG
BCDEFG
BCDE
BCDE
BCDE
BCD
CD
CD
CD
C
C
TPO ' s
8/ 18
3 4/2 1
1 7 / 44
L
L
L
L
L
L
L
KL
KL
AKL
AKL
AKL
AKL
AKL
AKL
AKL
AK
AK
AJK
AJK
AJ
AJ
AJ
AHJ
AHJ
AGHI J
AFGHIJ
AFGHIJ
ABFGHI J
ABEFGI J
ABEFGI
BCEFG
BCDEFG
BCDE
BCDE
BCDE
BCD
CD
CD
CD
C
C
D
D
D
D
D
D
D
D
E
E
E
E
E
E
E
F
F
F
F
F
F
F
G
G
G
G
G
G
G
G
H
H
H
H
H
H
I
I
I
I
I
I
K
K
K
K
K
K
K
K
K
K
K
J K
J K
J
J
J
J
J
J
J
J
J
J
Running Pro f i l e
Figure 4l.
March treasury bonds, January 9 , 19 8 7 .

L
L
L
L
L
L
L
L
L
L
L
L
L
L
L
L
94
F. Rotational Logic
L Calculating the Rotation Factor (RF).

a. Auction extreme (top or bottom) is higher
b. Auction extreme (top or bottom) is same (even)
c. Auction extreme (top or bottom) is lower
In all, there are five pos sible rotation scenarios:
(3)
(2)
( 1)
+1
(4)
+1
o
+1
-1
Top-Higher
Bot-Even
Figure 4 2.
o
-1
Top-Higher
Bot-Higher
(5)
Top-Even
Bot-Lower
-1
Top-Lower
Bot-lower
Calculation of the RF.
Top-Same
Bot-Same
+1
0
-1
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
90-19
90-18
90-17
90-16
90-15
9 0- 1 4
90-13
90-12
90-11
90-10
90-09
90-08
90-07
90-06
90-05
90-04
90-03
90-02
90-01
90-00
89-31
89-30
89-29
89-2 8
89-2 7
89-2 6
89-2 5
89-24
89-23
F +1
F
F
F
F
E +1 F
G -1
E
G
F
+1 E
F +1 G
E
G
E
G -1
E
E
E +1
A
A
A
A
A
0
B
B
B
B
B
B
B
D
D
D
D
D
D
D
+1
D
C -1 D
D
C
C
D +1
C
C
+1 C
C -1
A
A
A
A
H +1
H
H
H
H
H
H
H
H 0
I -1
I
I
I
I
I
I 0
L +1
L
L
L
+1 L
L
L
L +1
K
K
K
K
-1 K
K
K
K
K
K +1
J
J
J
J
J
J
J
J
J -1
Top Tota l
Bot Total
Overa l l RF
+1-1+1+1+1-1+1-1-1+1+1
+ 1- 1+ 1 + 1 + 1 - 1 - 1+0+0- 1+1+1
=
=
( Top + Bot )
=
=
+3
+3
+6
Figure 4 3 . Rotation Factors for June trea s ury bonds,

March 2 4 , 19 8 8.
Caution; An imP9rtant distinction which should. be s tated is that

the RF only indicates directional preference, Wlt trade
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
programs and the inherent leverage of the futures market, great
opportunities are often created 6y the market.
1650
1629
1628
1627
1 62 6
1625
1624
1623
1622
1621
1620
1619
1618
1617
1616
1615
1614
1613
1612
1611
1610
1 609
1608
1 60 7
1 60 6
1605
1 604
1603
1602
1 60 1
1 600
1599
1598
1597
1596
1595
1594
1593
1 5 92
1591
1590
1589
1588
1587
1586
1585
1584
F
FG
FG
FG
EFG
EFGH
EFGH
EFGH
EFGH
EFGH
EFGH
EFGH
EFGH
EFGHI
EFGI
EFGI
EFGI
EFI
EFI
EFI
DEFI
DEFI
DEFIJL
DFIJL
DFIJL
DJL
DJL
DJL
DJL
DJL
DJL
CDJL
CDJL
CDJL
CDJKL
BCDJK
BCJK
BCKL
BCKL
BCKL
BCKL
BCKL
BCK
BCK
BK
K
I
F igure 44 .
I
September Crude Oi l , Ju ly 6 ,
Copyright 1984 CBOT .
I
I
I
I
I
I
1576
I
I
I
I
I
I
1988 .
99
7660
7 60 4
7 60 2
7 600
7598
7596
7 5 94
7592
7590
7588
7586
7 5 84
7 5 82
7 5 80
7578
7576
7574
7572
7570
7568
7566
7 5 64
7 5 62
7 5 60
7 5 58
7556
7554
7552
7550
7 548
7 546
7 544
7542
7540
7538
7536
7534
7532
7 5 30
7528
7526
7 524
7522
7520
7518
7516
7514
Y
YZ
YZ
YZ
Y ZA
Y ZA
Y ZA
Y ZABC
YZABCD
Y ZABCD
Y Z BCD
YZBCD
Y Z BCD
YBCD
ZD
ZD
YDE
YDE
YDE
YEG
YEG
YEG
YEFG
YEFG
YEFG
YEFG
YFG
YFGH
YGH
YGH
YGH
YH
YH
YHI
YHI
YI
YI
YI
YI
YI
YI
I
I
I
IJ
IJ
7 5 00
7498
7496
7494
IJ
I
I
I
I
I
I
I
I
I
I
I
L Initiating
2 . Responsive
F igure 4 5 .
September Japanese yen ,

August 1 6 , 1 9 8 8 .
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
1 -+-+-+-+-+-+-+-+-+- 1
Risk
opportunity
10
1 -+-+-+-+-+-+-+-+-+- 1
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.
entry.
Trade location is not as important as is early
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
of the
as the
center
Point of Control should move consistently in the direction

one-timeframe activity. The point of control is defined
price containing the greatest number of TPOs closest to the
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
locate trades as close to the open as po s sible.
Ideally, look to
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:
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:
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
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:
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
reenter positions.
8 . Profit expectations should be moderate.
107
d.
Open-Auction.
Regardless of the direction you desire to trade:

Opportunity = 1
Risk
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 sg 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.

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BEYOND

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

THE LEARNING PROCESS

THE S EARCH FOR INFORMATION

PART 2: THE MARKETPLACE " THE TRADE FACILITATION PROCESS

ORTION OF THE MARKETPLACE

Revolves Around a Product

A. Continuous Creation of Activity

THE CONFLUENCE OF STRUCTURE, TIME AND LOGIC

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

Unlocking Thinking and Behavior

COMBINING THE MARKET PROFll.E * WITH TECHNICAL ANALYSIS

A. Market Profile * /Technical Combination I

PART 3: ANALY'ZING, IDEN'!UYlNG &: IMPLEMENTING DAY &: SWING TRADES

THE BIG PICTURE

Properly Analyzing The Longer Term Auction

DOING THE TRADE

A. Throw Away Exces s Baggage

1. Trade facilitation relationships.

The CBOT Market Profile * is a registered trademark of The Chicago Board of

Information contained in this seminar and workbook is gathered from sources

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

Commodity Communications Corporation via FutureSource.

WINdoTRAD via the Dalton LTA.

LEARNING PROC ESS

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

Lags the market.

2. Is late when it is announced.

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

2 . Fails to differentiate between price and value.

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

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

5. Fails to measure amount of trade facilitation.

Technical Appro aches

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

Before demonstrating this combination it is first nece s sary to

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

ORGANIZATION OF THE MARKETPLACE

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. Generally take a detached view.

E. All Participants Are Continually Gathering Information About the

Where are sell stops ?

5. What is at yesterday's high?

TH E TRADE FACILITATION PROC ES S

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

B. Evaluating Longer Term Trade Facilitation.

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

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

Selling Composite day - Open is in the upper

Neutral Composite day - Open is in the middle

5 . Old Busines s vs . New Busine s s

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

Longer Time frame

Higher Volume, Higher Value

Lower Volume, Higher Value

Weakening & Slowing

Higher Volume, OL to Higher Value

Lower Volume, OL* to Higher Value

Higher Volume, Unchanged Value