This edition of Capital Flow Market Discussion originally appeared on December 20, 1998. The text was derived from notes used by Mr. Steidlmayer at the December 12, 1998 class for Steidlmayer Software subscribers in Chicago.
In no way is Market Discussion intended as a recommendation of a particular trade. The information presented below is for informational in educational purposes only. Steidlmayer Software, Inc. assumes no responsibility for the results of any particular trade.
March Deutschmark contract as displayed by Capital Flow 32
Class notes for December 12, 1998
The most important part of market data is contained within individual data segments. Data segmentation has been the lost part of markets analysis, yet it is the single most important part. The information the market gives to all is direction which inspires trade and assures eventual balance. The natural way the market breaks up this focus (direction)) is through the independent participants who gain it in varying samples of data. It therefore has a different meaning to someone who is just starting a sample or segment compared to one that is half way to completion. Thus the analogy to match sticks -----where each stick is of different lengths and also of different composition as they relate to being finished as a product. Equality is everywhere in markets and in market information. This what the market strives to do and is what makes reading it objectively extremely difficult. Trading information that leads to intuitive feel comes from imbalances rather than balances. Balance is an resultant that is brought about by solving imbalances and all are relative. All prices at each transaction have an equal trade volume, total trade volume at the end of any period is equal on the buy/sell sides and this data represents the basis of most analysis. It therefore can be stated that finding relative balance leads to defined imbalances. Capflow 32 allows a measurement that parallels this amalgamation by providing a characterization of final product and lets the market determine the size of each stick. Its really a two dimensional reading---vertical and horizontal that represents the basic method of market communication through usage. It finds the information by a filtering process that resembles sifting sand through a sieve. In other words all segments of participants are working independently searching for information bits that reveal first a balance-----that is relative to all segments, and to imbalances that are again relative. The differences in segment information are therefore very close but real allowing the market to discover on a broad rather than limited front. The sensitivity of the front is extremely good at picking up any and all information bytes and in turn evaluating them through the usage process. The process of market discovery is directly related to how many and varied the trader sample sizes are. For instance, imagine a farmer feeding some chickens by spilling a narrow line of grain which the birds begin feeding along. Imagine that the line is in a circle and that each bird has its own separate domain on the line---some with more gain than others, some with higher quality grain etc. and then the farmer spills the bucket causing all birds to flock and fight for a new position at that advantageous location. In the pit, the discovery forces all to adjust to the new, all want some part of it, thus the direction around the imbalance which rations the outcome to some but not all.
The splitter-threshold functionality of Capflow 32 defines direction in much the same manner. Its starts by taking a vertical sample from the linear raw data that is continually produced by market development and allows for market determination of its horizontal shape. Its much like taking a sample of oranges from a production line that is boxing oranges for market. The samples are referenced to quality controls to help determine if the standards are being met by the source. The readings of the samples are referenced to themselves as well as collectively to determine the quality direction of the information flow. In other words, each sample is tagged to standards that allow a reading of the whole. The pulled data sample from the market is varied as it relates to direction and to its makeup of total price activity. The latter is brought to a singular focus within the unit through a range of predetermined standards (threshold definitions). It is not unlike the market process of individualistic trader segments. Thus each unit of direction created gives a individualistic reading and one of a comparative value. Collectively they refine and give a direction to the information flow. The information in this case is not of quality like in the orange example, but of relative balance to defined imbalances. A defined imbalance in the market always calls for direction as a corrective measure. Traders making a market trade their perceived imbalances for profit as the market trades out these imperfections. Imbalances from many segments that illustrate the same deficiency will define direction as the market seeks to return to balance. Reading a series of samples from the Capflow 32 splitter that carry both direction and a relatively defined balance standard will clearly refine and give a direction to the information flow in the same manner as individuals do.
NEW DIRECTIONAL INDICATOR SCREEN DISPLAY
When our data indicates that the market has made a directional change, a red arrow will illustrate where the change took place on the displayed data. By moving the cursor over the various units one can easily find this indicator. To help guide you in the search it is recommended that you look at the status line unit count and if it indicates a total of say eight units then moving the cursor to that unit will allow a quick finding. Failure arrows will be black when they fail to change market direction and red when they do so. It is important to note that these arrows are not trade indicators but directional indicators. The reasons for doing this is to illustrate the definition of directional data changes talked about earlier in this work, and to help you understand that the foundation for any type of opportunity is direction. Further, it must be understood that the changes themselves can tell a story. For instance, assume that the market is in a down direction and the data indicates a directional change....this change might be short lived and only represent a wobble in the initial direction before it resumes (use cursor to read individual units). Also, note that the directional indicator is just one of three that we monitor on the status line and is just a part of the total picture.
The data parameters for change consist of three units whether they represent a normal change or a failure. In the normal change they occur in sequence and the arrow illustrates the first unit and shows up only after the third is completed. In the failure change, we use the last two units followed by a trigger or opposite direction unit. The arrow shows immediately upon this trigger unit and therefore is more timely as it relates to this directional change. The three units are very important in that they represent a substantial enough data mass to become a cell of change. The data in this cell or segment contains the information related to the change and this allows the investigation and monitoring of the event to be focused on the proper data. In other words the seeds of success/failure are determined upon what's in the segment and it's development.
In looking at the status line directional information formats, it should be looked at in terms of two movements. Imagine the larger one is a yardstick and the second one is about 3 inches in length. The latter one will be the most current. When the directions are opposite, one needs to understand that current market data will be added to both. It is growth that is the market outcome determinate. The new unit being the smaller of the two will gain in influence as long as it grows and thus becomes the focus to watch. If the new data brings its demise (latest segment), then the growth is totally in the larger sample. This, then, determines trader focus and not the degree of profit /loss or other extraneous data related to the trade at hand. The factors that determine growth of the segments represent the critical information. Also, one needs to remember that to have illustrated a change in direction, an imbalance is clearly present. This either grows or dies.
The growth or demise of the cell/segment can be the degree of verticality within the isolated segment, the threshold makeup of the units, the quickness of data directional conditions......for instance, the change indicator on the status line reads 3-0 when direction first changes....if the next two readings are opposite it then reads 3-2 and another contrasting unit or just a neutral one (zero) will cause the segment to die.....or you may have a 3-0 and the last unit of change is a blue or efficient threshold, or a count of 7-4 which illustrates a struggle. Clearly, one must understand that direction is used by the market to find balance, and that any supporting data for growth/demise of the latest cell or segment is related to this measurement. Note---the fan lines might relate to the cell or latest segment in a way that shows connection/disconnection to the yardstick segment. .....i.e. the fans come from the large sample and the continuing data and certainly exert some influence as relates to the power of the new cell or segment
NEW FAILURE DEFINITIONS
We have incorporated two new failure definitions into our program. Where a clear direction is in place, and we find a green/red threshold with the red being cast in the same direction from the green as the direction in place and the following unit penetrates the level of the green and the last half hour bar in the penetrating unit is equal to or above/below the violated green when the unit is completed, the software will indicate a change in direction in the numerical count (1) in the status line and indicate "f" for failure and begin to restart the unit count from this point. This same definition is in place for a blue/green combination.
TRADING FOR DIRECTION
Direction is the inefficient equalizer within the markets structure. It is what the market does to find balance or temporary efficiency. Inefficiencies are relative imbalances and the information source that causes the market to move directionally. Direction is the measure----the only measure ---of the inefficiencies within the market structure.
Trading has always been opportunity based within the price structure of markets---average prices, trends, perceived high or low prices, etc.. The opportunities are mostly separated as to classification and managed reactively to external parameters. This fragmented approach is counter to productivity in that it ignores portfolio theory. Taken together they remain the reason for the lack of trading results that have been so well documented over time.
From any starting point, direction is always one dimensional---either up or down. It is also universal in that it is in every market. Trading is finding and managing an imbalance which markets express through direction. Approaching direction as the product for trading solves many of the inherit problems faced by traders today. Trading economics calls for an imbalance to be present in the market and the market expresses this internally through direction. Direction and trading profitability are a needed fit. The issue is not fragmented throughout the spectrum of opportunity, but rather concentrated as a single focus. This fits the portfolio theory which in turn enhances the chance for profitability.
My most recent insight into the market is directly related to market tolerance. This is not just a narrow discussion, but one that runs far deeper than our current thinking might indicate. Trading is a very tough game with most participants tending to lose over time. This fact in of itself tends to create the need for perfection. All sorts of disciplines and outside control are continuously advised and pushed upon participants. In examining the support structure of the markets one has to be struck by how simple the whole operation is. From the clearing house which is the repository for all trades, to the arena where all trades are initiated, the theme is one of just balance. .All moneys, ledgers, loans, trades, volume etc. have to be balanced. Problems arise when imbalances are found. The market itself has the same characteristic. There is not a single definition of balance that is hard to find, but many relative ones that can serve to define. This means that there is a wide range of relative balance/imbalances that can create meaningful market relationships. This coupled with the fact that the market itself is a self organizing mechanism around balance can only mean that tolerance is very high and not exacting as most commonly thought. Balance to defined imbalance can be broadly constructed in a range from very little balance to almost total balance.
Back testing, optimizing, imposing strict financial or trading controls on data, on ourselves need to be examined both in terms of their functional usefulness or whether or not one gets paid for the effort. Looseness in any human endeavor is the epitome of functionality. As the markets move to be more volatile and away from these types of controls, hard to manage expectations create an atmosphere of tightness. Defensiveness rather than offensiveness has always been a major part of a successful trading approach over time. This also has reinforced the need for a more exacting discipline and change is needed.
The tolerance level within direction can be very high while that of opportunities is far less so. The former needs to be the direct or primary focus while the latter really can be reduced to an after thought. Direction is so strong as an internal control that all introduced forms only lessen rather than increase it. A directional data base is needed to trade for direction and not some other substitute that ignores it or calls for a reinterpretation of data into it. This alone will create a better trading environment for most participants.
In reviewing the settings issue, it is important to note that it is the process, and not the output of direction that lends credibility to it. Varied settings will produce different directional output, but the output will fit the data measurements used. The question is what is the ideal setting and how does it differ from the others? The issue is one of data segmentation and naturally small/larger will produce faster/slower indications. The process proves itself by what follows the indicator and not where when the indicator occurs. Where, when can be related to the trading pits where several hundred individuals all have organized the market into varied segments (match sticks). The timing factor will rotate amongst all as the market develops which gives rise to the constant adjustment necessary for in-step timing. All this does is point out that perfect timing should not be the goal of data organization. What should be the goal is reliability----an indicator that is further developed directionally by the market. Once indicated (direction) the following data units should support it-----------i.e. a 3-0 start should build to an 8-1 meaning that the data was correctly sampled at the outset. It is the ability to withstand counter price activity that leads to greater goals than timing alone. The data can be opposite like moving averages and not be conflicting. The set up that is best is one that is one dimensional directionally and has some larger degree of not changing. I have experienced many 3-0 and outs and view them as good information in that the data turn was quick and complete. In reviewing my at home data base of both stocks and commodities, I found the following collective output with extremely varied settings per contract. Twenty commodities ranging in directional depth from 2-0 to 38-0 averaged 10 1/2 --and less than 1---on the stocks the extremes were 1-1 and 32-1 the average was 13 1/2 --1. Stocks- commodities combined averaged 12 1/3-less than 1. The individual equity position was positive in all but four instances with an additional eleven rated as even. All this points up the fact that if the direction indication is reliable and it by itself produces a net composite equity gain, it is far greater as a medium for success than optimizing timing which in of itself is very fleeting and the corresponding expectation-management is greatly compounded. Any operation operating within a positive producing equity format is bound to succeed meaning that skill now has a positive base from which it can further distinguish itself.
Going back to when I first started trading, I can remember making a large trade in soybean oil at the beginning of summer and having it move for me everyday within a two month period. It always settled favorably even though interim pricing was at times against me. It really was not the timing of the trade but the data output-direction with little or no corrections that allowed me to succeed. A distinct one dimensional directional format. In today's volatile world we are far from this type of situation happening as a regular occurrence. The role of trading has evolved more toward money management of opportunities which of course is external. I really think that one should trade for directional data and if accomplished all other external matter would fall into place easier and better as a byproduct of being right rather than trying to be right in the smaller context of just a trade itself.
There are other ways to accomplish a true one dimensional directional flow one of which can be done through product creation. Opportunity in trading is directly related to this one-sidedness and it follows that if products that have opposite directional indicators are combined into a single product, the directional one-sidedness should be enhanced. Optimization should really take place at this level and not at the trade timing zone. The expectation parameters for the participant demands that the direction be fully there at all times which makes management all that much easier from an objective point of view.
Explore the benefits of working within a positive directional equity base background versus one of an unknown quantity.
THE PAGE TWO MARK SERIES
A very penetrating experience from a perspective viewpoint. Its reflections range from a reading of the most current data to being a lagging indicator. It is the structural mix and its movement that are captivating. The formation of the last three marks upon the page offer a great deal of trading information. They give a direction from a collective point of view through their basic arrangement patterns that is both immediate and longer term. The marks are segment balances so being above/below them is clearly an imbalance. Their structure will then represent a larger type of balance as compared to the most immediate. As the market develops and a new page two emerges, the third moves to what was the second. The entire spectrum and its progress through development capably represent the relationship of balances that effect market direction. It is the force of imbalance that makes the market one dimensional or two as it tries to resolve the issues at hand.
It will take some time and experience working with the page two marks to gain a full understanding of their importance relating to market direction. Some things to begin noting are---the date on which the market first moved above the third---note that when the market is directional and the page twos move forward ------in most good situations the market will not violate the sanctity of the third. Note that the third generally lags and the date will accumulate for longer periods of time, but still has a fast forwardness about it that allows it to catch up when needed. It also is indicative how much time and development must take place to overcome a structural imbalance by indicating just how far the market must move vertically to overcome it. It is also indicative of when the opposite is true. Note---that the marks create limited patterns and that there is a relationship of patter to emerging pattern---also that these patterns have subtitles related to spacing within the marks themselves. The closer the spacing of the first two the more immediate the direction. The wider the spacing of the first two given a direction the more likelihood that more balance has been found and the direction is ending.
The date and a indicator of the most current half hour bar being above/below the marks is on the status line of your display screen. The marks themselves are overlaid upon the display screen..
In page two patterns there are several basic ones that merit discussion. When there are three page two's that line up as if in a trend line, it is important to note that for the direction to continue unabated, current prices must be over/under the first (most current) of the series. At the top/bottom of the market the page two's are generally related in the following manner------the third is at a level close to the second with the latter slightly above/below it, and the first occupying an opposite position in relation to the third.....i.e. the third is at 60, the second at 62, and the first at 59. When the market gets over the third , it usually represents a substantial gain directionally.
One sided data----that which only represents a current market imbalance--- is the real basis for trading. Direction is the market measurement for imbalance as its varied occurrence is used by the market to promote balance. Direction itself is a one sided piece of market information as it can be defined as there or not there i.e. an up direction can be nothing but and a down direction then the same. It is a measurement from a starting point to the present or current market position. It is not to be confused with trends which are varied definitions within direction usually an average of several market movements. A trend can have both an up/down component while a direction can not. This then is the reason that direction is basic starting point for market analysis. It is one sided and is at the top of information chain. It is what the market gives---it is the process of rationing that produces value where traders then can profit. The effect of direction is to cause the market to find an efficient price which in of itself does not represent a one sided but rather a two sided situation. Direction is always one sided and the amount of its movement reflects the degree of imbalance present in the market. It is never efficient and therefore presents the basic opportunity base within the market's structure. Information then is of two basic types--- two sided or efficient and one sided or non efficient. Therefore, the trader must orient his/her data base to this fundamental of market operation.
It naturally follows then that all data regardless of its dimensionality needs to be orientated to this same one sided dimension. There are many ways to achieve this within balanced information. Price activity, volume are two dimensional market data that can be formatted to show internal imbalances that serve to define direction. Direction can isolate the net effect of transactional balance by illustrating the net effect of equality upon it. Further, it is important to see how the payoff of direction is transferred to the individual.
BASIC EQUITY PLATFORM
The Wright Brothers discovered a way to make man fly and ever since their basic platform has been improved upon. Our discovery of directional measurement (arrow) as the platform for trading success is at its infancy. Many improvements will be made as time marches forward. To illustrate it significance at this point of time, the net equity of all arrow conditions in your data base will be calculated and displayed in the lower right status line. The display will show both up/down arrow equity positions from the last data unit that triggered the directional change( not from arrow itself as it illustrates the beginning data of directional change after change has been indicated). Each category will show (upon clicking) the last ten unit totals versus a time period. It will be important to understand the age of the calculations or duration profile---(on status line) i.e. 12-0---3-1 etc.) The combination of equity and its duration profile will provide a sound basis for understanding just how to approach the markets for maximum gain. It should be pointed out that maximizing the setting- threshold-arrow for any period of time is next to impossible. This is due to the fact that in the market it changes all the time so in fact there are no fish in that pond. By setting up several pages with different settings etc., the equity position will then be able to help indicate what's hot at the moment.
One of the effects of using the portfolio approach to the combined equity positions is that direction of equity should be even more one dimensional. As a matter of fact, there are two reason fore it behaving as such. The first is the profile duration concept----equity spread over a time duration which will tend to smooth out changes within it, and second, the net of opposite equity will tend to support the most dominate. This should serve to help the trader as the negative effects of volatility are greatly reduced and the benefits maximized.
CAPITAL FLOW PROFILE
Our volume formats process data in several distinctive ways. The capital flow display is a composite that borrows something from all the others. It purpose is to illustrate price-volume-direction as it relates to the trading activity taking place. As the volume dynamically builds during trading, our format pulls samples and classifies as low, higher, and one that is the highest.. The last twenty samples are depicted in this manner by color code---green-low, blue-higher, and red -high. The format calls for green or blue to follow themselves successively only if the following unit is less/more. As stated earlier, there is only going to be one red profile in the sample of twenty. One can easily detect the increase/decrease capital flows and the attempt/results of that activity upon market outcome. An overlay from the block profile is integrated into the display by coloring one time period of the effected profile red equaling the range of the low volume block. This will seldom occur if at all in the red display due its being the highest volume and the overlay representing a differing study low. There are many references that this display produces that can be classified into directional studies and almost any part of the display can reveal imbalances that help define direction.
The highest platform for trading is obviously when economic conditions are right and under control. The normal two sided economics that breed contract development will have shifted to one side and created a imbalance in the market. This in turn forces the market to move directionally thus moves control to the internal forces of market usage. This will be expressed in direction. Direction then is the basis for trading economics and is the first thing a trader must reach for. Most stop short of this by refusing to look beyond finding opportunity. Opportunity is looked as a unrelated issue once found. It is removed from this immediate reality by looking at past history as a correlated basis and by projection forward from external sources. Projection is the only form possible for most traders and therefore is used in what is admittedly a market of uncertainty. Past analysis of historic relationships or others for perceived profitable opportunities are processed and reprocessed assuming that all conditions have and will remain the same. This constitutes a rather large assumption that is not questioned since there is really no alternative and that alone is the justification.
IN NO WAY IS THIS DISCUSSION INTENDED AS A RECOMMENDATION OF A PARTICULAR TRADE. THE INFORMATION PRESENTED ABOVE IS FOR INFORMATIONAL AND EDUCATIONAL PURPOSES ONLY. STEIDLMAYER SOFTWARE ASSUMES NO RESPONSIBILITY FOR THE RESULTS OF ANY PARTICULAR TRADE.