Mind Over Markets

Preface xiii Acknowledgments xvii CHAPTER 1 Introduction 1 CHAPTER 2 Novice 7 Laying the Foundation 9 The Auction 9 Organizing the Day 10 Challenging the Rules 15 The Role of the Marketplace 16 Going with the Crowd 17 Introduction to Day Timeframe Structure 19 Normal Day 19 Dynamics 19 Structural Characteristics 21 Normal Variation of a Normal Day 21 Dynamics 21 Structural Characteristics 23 Trend Day 23 Dynamics 23 Structural Characteristics 23 Double-Distribution Trend Day 25 Dynamics 25 Structural Characteristics 25 Nontrend Day 27 Dynamics 27 Structural Characteristics 27 Neutral Day 27 Dynamics 27 Structural Characteristics 28 Day Type Summary 31 CHAPTER 3 Advanced Beginner 33 Building the Framework 34 The Big Picture: Market Structure, Trading Logic, and Time 34 A Synthesis: Structure, Time, and Logic 35 Ease of Learning 36 Amount of Information 36 Recognition Speed 37 Trade Location 37 Confidence Level 37 Summary 38 Evaluating Other Timeframe Control 38 Other Timeframe Control on the Extremes 40 Tails (or Extremes) 40 Range Extension 40 Other Timeframe Control in the Body of the Profile 40 TPO 41 Initiative versus Responsive Activity 45 Trending versus Bracketed Markets 49 Key Elements--A Brief Discussion 51 Trending Markets 54 Bracketed Markets 54 The Two Big Questions 56 CHAPTER 4 Competent 59 Doing the Trade 59 Section I 60 Day Timeframe Trading 60 Day Timeframe Directional Conviction 61 Opening Call 61 The Open 62 The Open as a Gauge of Market Conviction 63 Open-Drive 63 Open-Test-Drive 65 Open-Rejection-Reverse 68 Open-Auction 69 Open-Auction in Range 70 Open-Auction out of Range 71 Summary 73 Opening's Relationship to Previous Day--Estimating Daily Range Potential 74 Open within Value--Acceptance 75 Rejection (Breakout) 79 Open outside of Value but within Range--Acceptance 80 Rejection (Breakout) 83 Open outside of Range--Acceptance 84 Rejection 85 Summary 85 April 13,1989 86 Crude Oil 87 S&P 500 87 Gold 90 Japanese Yen 92 Soybeans 92 Treasury Bonds 92 Summary 95 Day Timeframe Auction Rotations 96 Two-Timeframe Markets 97 One-Timeframe Markets 97 Using Auction Rotations to Evaluate Other Timeframe Control 97 Structure 99 Half-Hour Auctions 100 Extremes 100 Range Extension 101 Time 101 Identifying Timeframe Transition 102 December Swiss Franc, October 12, 1987 103 Y to E: One-Timeframe Buying 104 E: Time 104 Y to F: Auction Test 104 G: Transition Confirmation 104 E to H: One-Timeframe Selling 105 H: Auction Test 105 I: Transition Confirmation 105 H-J: One-Timeframe Buying 105 Summary 105 Auction Failures 105 Excess 110 Signs of Excess 111 The Rotation Factor 112 Monitoring the POC or Fairest Price 115 9:30 a.m. Figure 4.30 116 10:00 a.m. Figure 4.31 118 10:30 a.m. Figure 4.32 119 Noon Figure 4.33 119 2:00 p.m. Figure 4.34 119 The Close 120 Day Timeframe Visualization and Pattern Recognition 122 Short-Covering Rallies 123 Long-Liquidation Breaks 127 Summary of Short Covering and Long Liquidation 128 Ledges 129 Summary 130 High- and Low-Volume Areas 131 High-Volume Areas 131 Identifying High-Volume Levels 132 High-Volume Examples 134 Low-Volume Areas 138 Low-Volume Examples 140 Summary 144 Summary--Day Timeframe Trading 145 Section II 145 Long-Term Trading 145 Long-Term Directional Conviction 146 Attempted Direction: Which Way Is the Market Trying to Go? 146 Auction Rotations 147 Range Extension 147 Long-Term Excess 150 Island Days 152 Long-Term Tails 152 Gaps 155 Summary 155 Buying/Selling Composite Days 155 Summary 157 Directional Performance: Is the Market Doing a Good Job in its Attempts to Get There? 157 Volume 158 Evaluating Changes in Volume 158 Volume as a Measure of Directional Performance 158 Value-Area Placement 159 Evaluating Directional Performance through Combined Volume and Value-Area Placement 160 Value-Area Width 169 Summary: Long-Term Activity Record 171 Long-Term Auction Rotations 183 Brackets 183 Trade Location in a Bracketed Market 188 Rule 1: Monitor Market Direction and Location within the Current Bracket 189 Rule 2: Markets Generally Test the Bracket Extreme More Than Once 190 Rule 3: Markets Fluctuate within Bracketed Regions 190 Rule 4: Monitor Activity Near the Bracket Extremes for Acceptance/Rejection 192 Transition: Bracket to Trend 192 Trends 193 Trade Location in a Trending Market 193 Monitoring Trends for Continuation 196 Transition: Trend to Bracket 197 Detailed Analysis of a Developing Market 201 Bracket Reference Points 201 Region A (Figure 4.87) 203 Region B (Figure 4.88) 205 Region C (Figure 4.89) 207 Region D (Figure 4.90) 208 Long-Term Auction Failures 210 Long-Term Short Covering and Long Liquidation 214 Applications 224 Corrective Action 225 The Function of Corrective Action 226 Summary 228 Long-Term Profiles 228 Using Long-Term Profiles 229 The Long-Term Profile in Action 229 Region A (Figures 4.98 and 4.99) 231 Region B (Figures 4.100 and 4.101) 235 Summary 238 Special Situations 238 3 to I Days 239 Neutral-Extreme Days 241 The Value-Area Rule 244 Summary 246 Spikes 247 Acceptance versus Rejection 247 Openings within the Spike 247 Openings outside the Spike 249 Bullish Openings 249 Bearish Openings 252 Spike Reference Points 252 Balance-Area Breakouts 252 Gaps 260 Day Timeframe Significance of Gaps 260 Summary 265 Markets to Stay Out Of 265 Nontrend Days 266 Nonconviction Days 266 Long-Term Nontrend Markets 267 News-Influenced Markets 269 Summary 269 News 269 Summary 274 Beyond the Competent Trader 275 CHAPTER 5 Proficient 277 Self-Understanding: Becoming a Successful Trader 279 Self-Observation 281 The Whole-Brained Trader 282 The Left Hemisphere 283 The Right Hemisphere 283 Combining the Two Hemispheres 283 Strategy 284 A Business Strategy 285 Capital 285 Location 286 Timing 286 Information 287 Know Your Competition 287 Know Yourself 288 Consistent, Daily Execution 288 Inventory 288 Risk 289 Goals 290 Record Keeping and Performance 290 Dedication 290 Applications 291 Summary 292 CHAPTER 6 The Expert Trader 295 CHAPTER 7 Experience 297 Set Aside Your Expectations 297 Mind over Markets in Profile 298 Market-Understanding and Self-Understanding 300 Perfect Practice Makes Perfect 300 Blinded by Price 300 Be Prepared 301 Perspective 302 Overnight Inventory 305 Gaps Can Be Gold 307 Gaining an Edge 308 The Fairest Price Revealed 309 Thinking Statistically 311 The Trader's Dilemma 311 The Most Important Omission from the First Printing in 1990 312 Emotional Markets 313 A Landscape View of the Market 314 Personal Evolution 315 Hierarchy of Information 316 Timeframe Control--Who Is Dominating the Current Session? 317 Markets Are Visual 318 Destination Trades 319 The Opening 319 Trends 320 Daily Perspective 322 Cognitive Dissonance 322 Imagination 325 False Certainty 326 Anomalies 326 Market Logic 328 We Are All Day Traders 329 APPENDIX 1 Value-Area Calculation 331 Volume Value-Area Calculation 331 TPO Value-Area Calculation 332 APPENDIX II TPO versus Volume Profiles 335 Single Price Level Distortions 336 End of Day Total Volume versus Ongoing Volume throughout the Day 337 Anomalies 337 Too Focused on Volume 339 Conclusion 339 Suggested Readings 341 About the Authors 343 Index 345