Mind Over Markets

JAMES F. DALTON has been a pioneer in the popularization of the Market Profile, a unique method of identifying trading/investment opportunities. He has been involved in the stock and futures markets for more than forty years. Currently a full-time trader, Jim advises two hedge funds and several trading firms. He is a discretionary trader and longtime proponent of employing the Market Profile to facilitate trading. Jim began his career in the investment industry as a broker with Merrill Lynch and Shearson Lehman. He is the coauthor of two books, the original edition of Mind Over Markets and Markets in Profile (Wiley).ERIC T. JONES is a Senior Managing Director and Head of Advisory Solutions and Product Development at TIAA-CREF. His past experience includes more than twenty-five years of developing new investment products and programs designed to help individual investors more successfully achieve their financial goals and dreams. Eric is the coauthor of two other books on the financial markets, investments, and trading: Hedging Foreign Exchange and Markets in Profile (both from Wiley).ROBERT B. DALTON is a partner at Karass Creative, a Seattle agency that bonds brands to tribes by telling stories that matter. For two decades, he has woven compelling campaigns across myriad media—from Addy-winning websites to short films and poetry—for a long list of artistic, nonprofit, and corporate clients ranging from Starbucks to TEDx. He is the coauthor of Markets in Profile (Wiley).

• Preface xiiiAcknowledgments xviiChapter 1 Introduction 1Chapter 2 Novice 7Laying the Foundation 9The Auction 9Organizing the Day 10Challenging the Rules 15The Role of the Marketplace 16Going with the Crowd 17Introduction to Day Timeframe Structure 19Normal Day 19Dynamics 19Structural Characteristics 21Normal Variation of a Normal Day 21Dynamics 21Structural Characteristics 23Trend Day 23Dynamics 23Structural Characteristics 23Double-Distribution Trend Day 25Dynamics 25Structural Characteristics 25Nontrend Day 27Dynamics 27Structural Characteristics 27Neutral Day 27Dynamics 27Structural Characteristics 28Day Type Summary 31Chapter 3 Advanced Beginner 33Building the Framework 34The Big Picture: Market Structure, Trading Logic, and Time 34A Synthesis: Structure, Time, and Logic 35Ease of Learning 36Amount of Information 36Recognition Speed 37Trade Location 37Confidence Level 37Summary 38Evaluating Other Timeframe Control 38Other Timeframe Control on the Extremes 40Tails (or Extremes) 40Range Extension 40Other Timeframe Control in the Body of the Profile 40TPO 41Initiative versus Responsive Activity 45Trending versus Bracketed Markets 49Key Elements—A Brief Discussion 51Trending Markets 54Bracketed Markets 54The Two Big Questions 56Chapter 4 Competent 59Doing the Trade 59Section I 60Day Timeframe Trading 60Day Timeframe Directional Conviction 61Opening Call 61The Open 62The Open as a Gauge of Market Conviction 63Open-Drive 63Open-Test-Drive 65Open-Rejection-Reverse 68Open-Auction 69Open-Auction in Range 70Open-Auction out of Range 71Summary 73Opening's Relationship to Previous Day—Estimating Daily Range Potential 74Open within Value—Acceptance 75Rejection (Breakout) 79Open outside of Value but within Range—Acceptance 80Rejection (Breakout) 83Open outside of Range—Acceptance 84Rejection 85Summary 85April 13,1989 86Crude Oil 87S&P 500 87Gold 90Japanese Yen 92Soybeans 92Treasury Bonds 92Summary 95Day Timeframe Auction Rotations 96Two-Timeframe Markets 97One-Timeframe Markets 97Using Auction Rotations to Evaluate Other Timeframe Control 97Structure 99Half-Hour Auctions 100Extremes 100Range Extension 101Time 101Identifying Timeframe Transition 102December Swiss Franc, October 12, 1987 103Y to E: One-Timeframe Buying 104E: Time 104Y to F: Auction Test 104G: Transition Confirmation 104E to H: One-Timeframe Selling 105H: Auction Test 105I: Transition Confirmation 105H-J: One-Timeframe Buying 105Summary 105Auction Failures 105Excess 110Signs of Excess 111The Rotation Factor 112Monitoring the POC or Fairest Price 1159:30 a.m. Figure 4.30 11610:00 a.m. Figure 4.31 11810:30 a.m. Figure 4.32 119Noon Figure 4.33 1192:00 p.m. Figure 4.34 119The Close 120Day Timeframe Visualization and Pattern Recognition 122Short-Covering Rallies 123Long-Liquidation Breaks 127Summary of Short Covering and Long Liquidation 128Ledges 129Summary 130High- and Low-Volume Areas 131High-Volume Areas 131Identifying High-Volume Levels 132High-Volume Examples 134Low-Volume Areas 138Low-Volume Examples 140Summary 144Summary—Day Timeframe Trading 145Section II 145Long-Term Trading 145Long-Term Directional Conviction 146Attempted Direction: Which Way is the Market Trying to Go? 146Auction Rotations 147Range Extension 147Long-Term Excess 150Island Days 152Long-Term Tails 152Gaps 155Summary 155Buying/Selling Composite Days 155Summary 157Directional Performance: is the Market Doing a Good Job in its Attempts to Get There? 157Volume 158Evaluating Changes in Volume 158Volume as a Measure of Directional Performance 158Value-Area Placement 159Evaluating Directional Performance through Combined Volume and Value-Area Placement 160Value-Area Width 169Summary: Long-Term Activity Record 171Long-Term Auction Rotations 183Brackets 183Trade Location in a Bracketed Market 188Rule 1: Monitor Market Direction and Location within the Current Bracket 189Rule 2: Markets Generally Test the Bracket Extreme More Than Once 190Rule 3: Markets Fluctuate within Bracketed Regions 190Rule 4: Monitor Activity Near the Bracket Extremes for Acceptance/Rejection 192Transition: Bracket to Trend 192Trends 193Trade Location in a Trending Market 193Monitoring Trends for Continuation 196Transition: Trend to Bracket 197Detailed Analysis of a Developing Market 201Bracket Reference Points 201Region A (Figure 4.87) 203Region B (Figure 4.88) 205Region C (Figure 4.89) 207Region D (Figure 4.90) 208Long-Term Auction Failures 210Long-Term Short Covering and Long Liquidation 214Applications 224Corrective Action 225The Function of Corrective Action 226Summary 228Long-Term Profiles 228Using Long-Term Profiles 229The Long-Term Profile in Action 229Region A (Figures 4.98 and 4.99) 231Region B (Figures 4.100 and 4.101) 235Summary 238Special Situations 2383 to I Days 239Neutral-Extreme Days 241The Value-Area Rule 244Summary 246Spikes 247Acceptance versus Rejection 247Openings within the Spike 247Openings outside the Spike 249Bullish Openings 249Bearish Openings 252Spike Reference Points 252Balance-Area Breakouts 252Gaps 260Day Timeframe Significance of Gaps 260Summary 265Markets to Stay Out Of 265Nontrend Days 266Nonconviction Days 266Long-Term Nontrend Markets 267News-Influenced Markets 269Summary 269News 269Summary 274Beyond the Competent Trader 275Chapter 5 Proficient 277Self-Understanding: Becoming a Successful Trader 279Self-Observation 281The Whole-Brained Trader 282The Left Hemisphere 283The Right Hemisphere 283Combining the Two Hemispheres 283Strategy 284A Business Strategy 285Capital 285Location 286Timing 286Information 287Know Your Competition 287Know Yourself 288Consistent, Daily Execution 288Inventory 288Risk 289Goals 290Record Keeping and Performance 290Dedication 290Applications 291Summary 292Chapter 6 The Expert Trader 295Chapter 7 Experience 297Set Aside Your Expectations 297Mind over Markets in Profile 298Market-Understanding and Self-Understanding 300Perfect Practice Makes Perfect 300Blinded by Price 300Be Prepared 301Perspective 302Overnight Inventory 305Gaps Can Be Gold 307Gaining an Edge 308The Fairest Price Revealed 309Thinking Statistically 311The Trader's Dilemma 311The Most Important Omission from the First Printing in 1990 312Emotional Markets 313A Landscape View of the Market 314Personal Evolution 315Hierarchy of Information 316Timeframe Control—Who is Dominating the Current Session? 317Markets are Visual 318Destination Trades 319The Opening 319Trends 320Daily Perspective 322Cognitive Dissonance 322Imagination 325False Certainty 326Anomalies 326Market Logic 328We are All Day Traders 329Appendix 1 Value-Area Calculation 331Volume Value-Area Calculation 331TPO Value-Area Calculation 332Appendix II TPO versus Volume Profiles 335Single Price Level Distortions 336End of Day Total Volume versus Ongoing Volume throughout the Day 337Anomalies 337Too Focused on Volume 339Conclusion 339Suggested Readings 341About the Authors 343Index 345