Anticipating the Trading Day's Market Structure
To Shadow Traders,
As mentioned in prior posts, even if you are a longer term trader, on the day you enter or exit trades you are a day trader. Also mentioned is the fact that the appropriate trading strategy depends on whether the markets are trending or balancing. So if you are going to trade intraday, the first order of business each day is to determine whether the markets are going to be more directional/trending or rotational/balancing in the day time frame.
In James Dalton's book Mind Over Markets, James discusses market information that is available after the open that can give clues as to the type of market that is likely to develop intraday.
First some basic background about the Day Types described in Mind Over Markets.
The Day Types are listed below in order of occurrence:
1) Normal Variation Day: Occurs around 50% of the time. It is characterized by extension beyond the Initial Balance Period in one direction only, and market development characterized by relatively wide rotation for a significant part of the day.
2) Neutral Day: Occurs around 25% of the time. It is characterized by price extension on both sides of the Initial Balance Period. Neither, the OTF buyer or OTF seller can take directional control. It is often a wide range day.
3) Double Distribution Day: Occurs around 10% of the time. It is characterized by horizontal development (balancing) with two distinct nodes featuring rotational market activity separated by an area of low volume, often single prints, indicating a sharp move from one part of the day's range to the other. It is usually a wide range day.
4) Normal Day: Occurs around 5% of the time. It is characterized by a slight extension in one direction beyond the Initial Balance Period, but with a small overall range for the day.
5) Non Trend Day: Occurs around 5% of the time. It is characterized by no extension outside the Initial Balance Period. There is no OTF buyer or seller involvement.
6) Trend Day: Occurs less than 5% of the time. It is characterized by wide range and persistent directional conviction with the OTF buyer or seller in control all day, with little, and narrow, price rotation. It typically opens near one of the day's extremes and closes near the other.
The occurrence rates listed above vary and are met to represent an approximate magnitude of occurrences. As you can see Normal Variation and Neutral Days account for around 75% of occurrences. The least common is a Trend day occurring less than 5% of the time. Even though it does not occur much, the trend day is extremely important because it can account for big gains if you are on on the right side or big losses if you are on the wrong side.
Don't get hung up on the names of the day types, they are mostly academic. You should be more focused on whether the evolving trading day is more directional/trending or rotational/balancing.
Early Market Information that can give clues to Market Direction and Confidence:
1) Opening Price Inside or Outside Yesterday's Value/Range
2) Trading Day Extreme
3) Opening Type
4) Price Acceptance Inside or Outside Yesterday's Value/Range
Opening Price Inside or Outside Yesterday's Value/Range
1) If opening price is within yesterday's Value/Range, there are higher odds of a more
rotational/balancing day with a smaller range.
2) If opening price is outside yesterday's Value/Range, there are higher odds of a more
directional/trending day with a larger range.
Trading Day Extreme
1) The High or Low of the Day occurs in first 30 minutes around 50% of the time.
2) The High or Low of the Day occurs in first 60 minutes around 75% of the time.
Opening Type
1) Open-Drive: Is the highest confidence opening which is generally caused by OTF participants who have made their trade decisions before the opening bell. The market opens and aggressively auctions in one direction. Price does not return back through the opening range and leaves the most reliable extreme.
2) Open-Test-Drive: Is the next highest confidence opening which generally opens and tests beyond a known reference to make sure there is no new business to be done in that direction. The market then reverses and auctions aggressively back through the open. This opening type leaves the second most reliable extreme.
3) Open-Rejection-Reverse: Is characterized by a market that opens, trades in one direction, and then meets opposite activity strong enough to reverse price and return it back through the opening range. Lower confidence opening where initial extremes only hold about half the time.
4) Open-Auction (Inside Value/Range): Market opens, auctions in one direction until activity slows, then auctions in the other direction. Neither, the OTF buyer or OTF seller is present with any level of confidence. Any extremes established early on, have a low probability of holding for the entire day.
5) Open-Auction (Outside Value/Range): Opens outside Value/Range and auctions around open. Higher odds of directional conviction developing because of open outside Value/Range.
The type of opening sets the tone for the day and has a lot to do with the type of day that develops. The higher confidence opens tend to evolve into more directional/trending days and the lower confidence opens tend to evolve into more rotational/balancing days. The chart below shows the relationship between opening types and day types as well as market profiles.
Price Acceptance Inside or Outside Yesterday's Value/Range
1) If there is price acceptance within yesterday's Value/Range, there are higher odds of a more rotational/balancing day with a smaller range.
2) If there is price acceptance outside yesterday's Value/Range, there are higher odds of a more directional/trending day with a larger range.
If you use the clues from the early market action or tone you can anticipate the evolving day type/market profile which can translate into selecting the most appropriate trading strategy intraday and into taking advantage of lower risk asymmetric trade locations.
To Shadow Traders,
As mentioned in prior posts, even if you are a longer term trader, on the day you enter or exit trades you are a day trader. Also mentioned is the fact that the appropriate trading strategy depends on whether the markets are trending or balancing. So if you are going to trade intraday, the first order of business each day is to determine whether the markets are going to be more directional/trending or rotational/balancing in the day time frame.
In James Dalton's book Mind Over Markets, James discusses market information that is available after the open that can give clues as to the type of market that is likely to develop intraday.
First some basic background about the Day Types described in Mind Over Markets.
The Day Types are listed below in order of occurrence:
1) Normal Variation Day: Occurs around 50% of the time. It is characterized by extension beyond the Initial Balance Period in one direction only, and market development characterized by relatively wide rotation for a significant part of the day.
2) Neutral Day: Occurs around 25% of the time. It is characterized by price extension on both sides of the Initial Balance Period. Neither, the OTF buyer or OTF seller can take directional control. It is often a wide range day.
3) Double Distribution Day: Occurs around 10% of the time. It is characterized by horizontal development (balancing) with two distinct nodes featuring rotational market activity separated by an area of low volume, often single prints, indicating a sharp move from one part of the day's range to the other. It is usually a wide range day.
4) Normal Day: Occurs around 5% of the time. It is characterized by a slight extension in one direction beyond the Initial Balance Period, but with a small overall range for the day.
5) Non Trend Day: Occurs around 5% of the time. It is characterized by no extension outside the Initial Balance Period. There is no OTF buyer or seller involvement.
6) Trend Day: Occurs less than 5% of the time. It is characterized by wide range and persistent directional conviction with the OTF buyer or seller in control all day, with little, and narrow, price rotation. It typically opens near one of the day's extremes and closes near the other.
The occurrence rates listed above vary and are met to represent an approximate magnitude of occurrences. As you can see Normal Variation and Neutral Days account for around 75% of occurrences. The least common is a Trend day occurring less than 5% of the time. Even though it does not occur much, the trend day is extremely important because it can account for big gains if you are on on the right side or big losses if you are on the wrong side.
Don't get hung up on the names of the day types, they are mostly academic. You should be more focused on whether the evolving trading day is more directional/trending or rotational/balancing.
Early Market Information that can give clues to Market Direction and Confidence:
1) Opening Price Inside or Outside Yesterday's Value/Range
2) Trading Day Extreme
3) Opening Type
4) Price Acceptance Inside or Outside Yesterday's Value/Range
Opening Price Inside or Outside Yesterday's Value/Range
1) If opening price is within yesterday's Value/Range, there are higher odds of a more
rotational/balancing day with a smaller range.
2) If opening price is outside yesterday's Value/Range, there are higher odds of a more
directional/trending day with a larger range.
Trading Day Extreme
1) The High or Low of the Day occurs in first 30 minutes around 50% of the time.
2) The High or Low of the Day occurs in first 60 minutes around 75% of the time.
Opening Type
1) Open-Drive: Is the highest confidence opening which is generally caused by OTF participants who have made their trade decisions before the opening bell. The market opens and aggressively auctions in one direction. Price does not return back through the opening range and leaves the most reliable extreme.
2) Open-Test-Drive: Is the next highest confidence opening which generally opens and tests beyond a known reference to make sure there is no new business to be done in that direction. The market then reverses and auctions aggressively back through the open. This opening type leaves the second most reliable extreme.
3) Open-Rejection-Reverse: Is characterized by a market that opens, trades in one direction, and then meets opposite activity strong enough to reverse price and return it back through the opening range. Lower confidence opening where initial extremes only hold about half the time.
4) Open-Auction (Inside Value/Range): Market opens, auctions in one direction until activity slows, then auctions in the other direction. Neither, the OTF buyer or OTF seller is present with any level of confidence. Any extremes established early on, have a low probability of holding for the entire day.
5) Open-Auction (Outside Value/Range): Opens outside Value/Range and auctions around open. Higher odds of directional conviction developing because of open outside Value/Range.
The type of opening sets the tone for the day and has a lot to do with the type of day that develops. The higher confidence opens tend to evolve into more directional/trending days and the lower confidence opens tend to evolve into more rotational/balancing days. The chart below shows the relationship between opening types and day types as well as market profiles.
Price Acceptance Inside or Outside Yesterday's Value/Range
1) If there is price acceptance within yesterday's Value/Range, there are higher odds of a more rotational/balancing day with a smaller range.
2) If there is price acceptance outside yesterday's Value/Range, there are higher odds of a more directional/trending day with a larger range.
If you use the clues from the early market action or tone you can anticipate the evolving day type/market profile which can translate into selecting the most appropriate trading strategy intraday and into taking advantage of lower risk asymmetric trade locations.
