BAllETS DD BAllET tlQl� 3: Peter J teidlmayer and Kevin Koy The Porcupine

Press, Chicago

Copyrig ht © 1986 by The Porcupine Press All rights reserved. No part of

this book may be repr oduced or utilized in any form or by any means ,
electronic or mechanical, including photo copying, recording or by any
information storage and retrieval system, without permission in writing from
the Publis her. Inquiries should be addr essed to The Porcupine Press, 401
S. LaSalle St, Suite 1101, Chicago, IL 60605. ISBN 0-941275-00-0 Printed in
the United States of America First Edition Book Design by Shi Yung

To the trekker, Africa, 1984. - J. Peter Steidlma yer To those who push
the third quarter. -- Kevin Koy

Why I.E Dalton Associates is particularly proud to sponsor Markets and

Market Logic No one knows exactly how large an advantage on-the-floor
futures traders have had over off-the floor traders. But we do know
whatever that advantage was it's now a great deal less - thanks to].
Peter Steidlmayer, Kevin Koy and the CBOT That's good news for you. And
it's good news for us. As a discount broker we're in business to serve
the knowledgeable, independent trader. 1-800-362-81 17 J.EDALTDN ASSOCIATES
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CONTENTS SECTION I - The Market's Principles Page 1. Introduction of

Purpose 1 2. The Principles of Market Logic, Operational Procedures and
Characteristics 6 3. Some Thoughts on the Random Walk and Efficient Market
Theories 11 4. Components of a Marketplace The first two observations 16
5. Components of a Marketplace The third and fourth observations 22 6.
Components of a Marketplace Behavioral Observations 27 Section II -
Illustrative Examples 7. Illustrative Examples of Market Logic 49 8. Some
Non -Hypothetical, Very Readable Markets 55 9. The Market's Most Important
Characteristic 60 10. A Glance at the Futures Markets 69 Section III -
Practical Applications for the Investor- Trader 11. How Best to Get Results
119 12. A Market Understanding 137 13. You 138 14. Trading (and
Investing) Strategy and Techniques 147 15. Conclusions 160

I. The Markefs Principles

1 INTRODUC TION OF PURPOSE A problem exists in today's civilized world

which transcends talk of trading, investing or any pursuit of material gain
whatever. With civiliza tion, something very integral to the individual's
ability and hence his potential fo r success and personal satisfaction has
been lost. It involves the method man has for acquiring knowledge, which
impacts his ability to confidently generate decisions. In less civilized
societies of the past, man fed and clothed himse lf, defen ded himself from
the elements and his aggressors, and was in virtually every way forced
to be self-reliant. His very survival depended on his ability to generate
decisions, based on his knowledge combined with his understanding of the
current situation. To gain knowledge he observed, recorded, and organized
his existence and reality , then drew logical conclusions. In other words,
his self-r eliance and ability to generate sound decisions came from his
knowledge, which in tum came from his own personal exper ience, his exposur
e to reality over time. Thus, man 's decision-ma king was once a direct
outgrowth of his experience. And as he continually generated sound
decisions, his confidence in his ability to interpret reality and react
accordingly grew . In the modem age, society 's concept of knowledge does
not come primarily from observing reality. It comes from exposure to classr
oom education, learning from the teachings of instructors and authors.
Knowledge - and society's presumption of an individual 's ability to generate
sound decisions - rests with that individ ual's exposur e to formal classr
oom education and inculca tion in society. This is particu larly true in the
study of finance and market behav ior where laboratory

2 MARKETS AND MARKE T LO GIC experimentation is not part of the normal

curriculum. Yet, what is taught in the classroom often has no basis in
practical reality. In other words, experience is discounted. This means
that modem man's knowledge - and the manner in which society measures his
assumed decision-making abilities - often has no basis in reality. In
civilized society, man is not continually forced to think for himself. Thus,
today we have two forms of knowledge: that which comes directly as a result
of one's own observation of reality, and that which comes from a deriv ative
source such as a teacher, a book, a television show or movie, etc. The
first form was all that man had prior to the introduction of sophistic ated
forms of communicat ion. The second form modern man relies on heavily,
often at the expense of being correct and accurate. The problem that
comes from relying on the second form of knowledge is illustrated in what
has been promulgated about organized mar kets. Most of what has been
written and pr omoted, while generally accepted as correct, is illogical.
(Surprisingly little published informa tion has been compared to reality,
thought through and revise d.) Because of this discounting of exposure to,
and observation of, market reality, little has been published which
conceptualizes and develops a sound trading and investing understanding and
approach. Until now, only one of the two possible logical approaches to
organized futures, options, and stock markets has been advanced. This was
presented in Securi ties Analys is, the groundbreak ing work of Benjamin
Graham and William Dodd. Graham and Dodd assumed that price and value
were not necess arily equal in organized markets , and advocated that
investors study fundamental (outside the market) inform ation to locate
situations where price was below value. To our knowledge, until now, no work
has been published which has gone beyond Graham and Dodd to correctly
specify how marke ts, particularly organized markets, function in reality,
and how a person, once he understands the market, can put the odds of
success in his favor to a consider able extent. Markets and Market Logic will
present knowledge, but knowledge which is not distilled by what has been
previously taught. The knowledge presented in this book is drawn directly
from exper ience. Unfortunately, now that this knowledge is put in book
form, it becomes part of the second category , knowledge once removed. It
is therefore impor tant for each reader to go beyond this book. Observe,
reflect and analyze what is put forth herein as reality in markets
familiar to you, and think for yourself. This should be feasible, since
knowledge provided in this book will build upon each reader's own experience.
This book will demon strate that all markets act alike, a concept which
should be understood by consumers who have practical exposure to everyday
markets. This is not to say that the knowledge and concepts introduced herein

THE MARKET 'S PRINCIPLES 3 will be easy to embrace and apply. Indeed, they
are expected to be very difficult to accept for all but the most open-minded
of organized market participants. This is because a plethora of incor rect
knowledge that has been disseminated must be unlearned. Knowledge provided
in this book refutes the idea that markets move randomly and therefore cannot
be understood. It refutes the idea that predicting market direction - a
happenstance approach which indi rectly relies on the strength of the
individual - is a reliable way to approach a market . It refutes the
efficient market theory belief that the market is " unbeata ble, " since all
opportunities are equal because price and value are always identical in an
organized market . It debunks some myths regarding risk. Lastly, it refutes
the current appro aches to trading that differ from the sound approach of
investing. Most persons approaching organized markets enter clouded by
these assumpt ions, and begin by being lost from the ground up, unable to
obselVe reality with a blank slate. For example, few participants who gain
market knowledge from the second sourc e understand a market 's purpo se,
while those who have gained market knowledge from experi ence immediately
agree with the statement that a market 's purpose, the reason it exists, is
to facilitate trade. (This is a statement the reader of this book will soon
grow weary of.) In facilitating trade, the most important function of the
marketplace - a function that is key to understanding it - is to provide
market-generated information. Another aim of this book is to refute the idea
that knowledge of the marketplace must be bought. We hope to decentralize
the ability to understand and profit from markets by showing that everyone
has the ability to obselVe, reflect, analyze and make his own decisions in
all market situations. We further hope that the reader sees the simila rities
of all things and concludes that in broad terms, most things financial are
the same. The reade r's challenge in understanding organized markets is to
think and consider all possibilities which occur from a logical standpoint,
to set aside current approaches to market s and learn to read them,
monitoring them forward through time. We hope to demystif y the ability to
understand an organized market. To understand a market is nothing more than
reading market-generated information. Market-generated information has been
in exi stence since the first marke tplace and has been available to anyone
who cares to seek or read it. It is the traditional financial world's
lost resource. While market-generated information goes predominantly
undiscove red or unnoticed in the organized market s, it nevert heless is of
inestima ble value to those few participa nts who understand the logic
behind marke ts, and know how to find, read and interpret - and finally know
how to act on it. The assumption behind relying on market-generated informa
tion - commonly done by a few very succes sful participants who are
regularly close to a market - is that knowledge and under-

4 MARKETS AND MARKE T LOGIC standing of the present is the key that
unlocks the mystery of the market. It has impor t far beyond a standard high,
low and close or the price of the most recent transaction. Market-generated
information differs markedly from outside infor mation, information
generated from a related source which can then be applied to the marketplace
(e.g., the type of informa tion G raham and Dodd studied: balance sheets,
industry growth , demand or harvest projections, new management, etc.).
Thus, market-generated informa tion is not once removed, it is reality, and
will only change through time. Theref ore, it is not a potentially
inaccurate prediction. (Consist ently accurate predictions of future
possibilities are not within the average person 's capabilities, and poor
predictions are often the antithesis of value.) The key to understanding
market-generated information lies in organizing the seemingly chaot ic,
seemingly random market activity into meaningf ul, measurable data segments
which can be captured, defined and then monitored. This provides a sound
basis for inter preting the price data and allows a person a sound
decision-ma king process - to act or not to act. Thus, market-generated
information is nothing more than a time-series plot of transactional data:
price data plotted over time, formulated into a format which lends
itself to statistical measurement and comparison. (In our case, we have
chosen the bell curve, normal distribut ion. The following graphic, attributed
to statistician W. J. Youden from The Visual Display of Quantifiable
Information, says much about why the bell curve is significant to a market
understand ing.) TIIE NORMAL LAW OF ERROR STANDS OUT IN TIIE EXPERIENCE OF
MANKIND AS ONE OF TIIE BROADEST GENERAUZATIONS OF NATURAL PHILOSOPHY· IT
SERVES AS THE GUIDING INSTR UMENT IN RESEARCHES IN THE PHYSICAL AND
SOCIAL SCIENCES AND IN MEDICINE, AGRIC ULTURE AND ENGINEERING· IT IS AN
INDISPENSABLE TOOL FOR TIIE ANALYSIS AND TIIE INTERPRETATION OF TIIE BASIC
DATA OBTAINED BY OBSERVATION AND EXPERLMENT· With the bell curve
organizing data, reading and understanding market activity simply calls fo
r being able to understand how, where , when and under what conditions
participants use the market , then being able to isolate or key in on
factors that are important at that time, while filtering out those factors
which are unimportant. Reading the information genera ted from the marke
tplace as it is generated allows anyone to relate price against value,
applying this knowledge of the present to his particular situation.

THE MARKE T'S PRINCIPLES 5 Beyond understa nding the importance of knowledge
of the present and the importance of arrang ing transactional data into the bell
curve, the approach to markets advanced in this book incorporates two basic
equat ions. The first is used to break down and define market reality. The
equation is simply: price + time = value. This statement is known and
even obvious to most intelligent persons; subconsciously we accept a known
produ ct's price as value as we repeatedly are charged that price over
time. The equation also holds true for the most complex mar kets. It
captures and defines a market's range of activity, creating a distinction
between prices which are accepted as fair value and those prices which the
market rejects as tempo rarily unfai rly above or below value in the current
timeframe. The second equation is useful for defining a framework for accom
plishing results. It shows that in a given market opportunity, results =
market understanding x (you + trading strategy). This equation describes
and pinpoints the areas which comprise successf ul trading or investing.
With all the market understanding this book will provide, the key to success
still is the responsibility of the individual. Such an under standing will
prevent an individual from placing himself in a position where he must
function above reasonable expectations in order to succeed. He must have
the ability to remain disciplined while integrat ing his thought process into
his capabi lities.

2 THE PRINCIPLES OF MARKET LOGIC, OPERA TIONAL PROCEDURES AND CHARA

CTERISTICS T he goal of the following section is to advanc e a rather
straight forward and logical argument: In order to understand a mark et's
structure , one needs to read and gain an understanding of present market-
generated infonnation. Once this is accomplished, one is able to distinguish
between types of market activity as well as prices. To provide the meat of
the argument, the following principles have been stripped to their barest
essentials and are presented in outline fonn. The principles presented in
this outline, their implications for trading and investing implementation,
and several definitions will be developed later in this section and
illustrated in working examples in the second section. Do not become intimi
dated by this outline. Skip it if you must, and refer back to it as you
become comforta ble with these concepts as they are developed and explained
in later chapters .

THE MARKE T'S PRINCIPLES 7 I. A free marketplace is one in which

participants are voluntarily active. II. Required for a marketplace: A)
product B) need for product III. Purpose of the marketplace: A) to
facilitate trade I) a location 2) market-imposed timeframes IV.
Marketplace functions with: A) product B) need for product C) price
promoting activity through excess D) time regulating activity V.
Marketplace advertises opportunity by offering price away from value. A)
A response to this opportunity can be ab sent. B) A response can be
present, taking advantage of the opportunity. C) A response can be
opposite, overtaken by initiating activity unperceived by the marketplace
at that moment. I) Activity is one which goes counter to the promotion
for which the market is advertising. VI. Marketplace is controlled and
regulated through the distribution of price and time, yielding types of
natural organization which produce balance (a "fair" area where two-sided
trade takes place). VII. The combination of all these components in an
active phase is called market activity. A) Market activity is composed
of a range of time-price opportunity occurrences, TPO being the market's
bas ic unit of mea surement. VIII. Market activity is an expression of
participant need, triggered by: A) market-imposed timeframes B) participant
time frames I) A market's volatility is dependent on the mix of long
and short market-imposed and participant timeframes. IX. Market activity
generates information: A) A readable preference of variant time-price
opportunities which occur at different times, at different or the same
prices, at different or the same levels of volume. This is an
expression of accepted, rejected or changing value by participants as a
whole. I) Time-price opportunities (and hence prices) can appear with a
large or small relative amount of time. a) Those time-price opportunities
resulting in a large amount of time must result in large transactional
volume and display market acceptance or value for both sides in that
timeframe. b) Those time-price opportunities resulting in a small amount
of time must result in small transactional volumc and display market
rejection or unfair value for one side in that timeframe.

8 MARKET S AND MARKE T LOGIC B) This amounts to market distinction as to

price. I) prices accepted versus prices rejected C) A further distinction
of the type of market activity can be made within the framework of
acceptance/rejection. I) prices in a market-created opportunity which arc
responded to versus prices in a market-created opportunity which arc
overtaken by other initiating forces. Therefore, Price + Time ; Market
Acceptance (responsive or initiating) ; Transactional Vol ume ; Market
Value (definition of all free markets) X. All markets, although they may
be structured differently (dealership, auction house, exchange market,
etc.) arc nevertheless motivated by the same forces, and operate based
on these basic principles. A) traders and investors should understand
sound market logic so that they can extract and read market-generated
information to satisfy their particular needs in every marketplace. THE
MARKET'S OPERATIONAL PROCEDURES What the Market Does to Create Activity
A) The concerns and needs of the participants which collectively
determine the activity of a marketplace are many and varied and can be
different for different timeframes, but are brought to balance in the
closest timeframe. These concerns and needs arc not necessarily balanced
in time frames outside the closest parameter. B) In balancing itself,
the market focuses on a dominant set or single concern or news item --
whether real or imagined -- and neutralizes that in the very short run
by offering a range of prices in or der to locate an area wh ich faci
litates trade. In doin g so, the market makes the si tuati on fa ir to bot
h sides in the clos est timeframe. C) Once balance is found, the
marketplace will continue to trade in this fair area until another
influence from either the immediate or longer term timeframe enters and
upsets the balance, shifting to a new price area. This new balance can
be changed by a new set of concerns or participants becoming active.
This process can be continuous or opposite to the initial dominant
conccrn in nature. In the short run, this process is rapid and
volatile. I) Thus, the dominant conecrn usually motivates the short
timeframe participants to change the price to creatc fairness. 2) The
dominant concern usually does not motivate the long timeframe participant.
He is often motivatcd to takc thc "fair price area" as a markct-createn
opportunity or pricc excess in his timeframe. In other words, the
activity of the longer timeframe may upset the balance created in the
short term. D) The market provides a range of time-price opportunit'ies
on which par tici pants can act. Their action or inaction determines the
structure of the marketplace. The market rotates in order to bring in
in volv ement of all timeframes and facilitate trade. The price area most
accepted is the price area most often used, which therefore is the
price area which facilitates trade, which is accepted as value. E) The
market will continuously offer various time-price opportu nit ies to
reassure this activity. F) The nonaccepted prices are either over- or
undercompensations used to find balance. It is these over- or
undercompensations which motivate entrance by longer timeframe
buying/selling participants, either dcsiring to take advantage of price
away from

T HE MARKE T'S PRINCIPLES 9 value or due to distress, and which are used
as reference points for the short timeframe participant. G) This over- or
undercompensation is always present in the marketplace to a small or
large extent, depending on volatility or commonplace among participants,
which is dependent on the mix of timeframe influence. H) The marketplace
regulates itself and exercises control over its primary function, which
is to facilitate trade. It does this when, as the market moves toward
the extremes of the balance area, it becomes attractive for long time
frame participants, and at the same time attracts short timeframe
traders. Thus, the market created opportunity does not last long, because
of increased competition to take advantage of the opportunity. This
introduces time as the controlling factor in the marketplace. Market
Characteristics I. All markets are essentially auction markets. A) There
are two cate gories of auct ion markets . I) Active auction -- range
develops during negotiation. 2) Passive auction -- range is already
predetermined in a packaged offering. B) Active auctions can go from low
to high or from high to low. In the auction process, the market will
continue in the same direction in an effort to facilitate trade until
the last buyer or seller has participated. C) All prices change from
the previous price for a purpose, that being to satisfy the condition
of the market. II. Participants have a spectrum of timeframe perspectives
during which they operate. For simplicity, participants can be classified
into two categories according to their timeframe perspective . A) Those
conducting business for the short term (or day) -- short timeframes. B)
Those conducting business outside this parameter - long (or other)
timeframe. I) Those with different timeframes operate in the market
differently. a) Short (day) timeframe - looking for fair price within a
short time. b) Long (other) timeframe - looking for market-created
opportunity where it relates to individual participant need, an elective
type of activity. III. Activity Levels for timeframes are as follows: A)
Short timeframe participant activity usually makes up most of the
transactional volume in a given timeframe. B) Long timeframe participant
activity usualJy makes up a smalJ amount of the volume in the same
timeframe. I) Anxiety level for a short timeframe participant ranges from
acti ve to passive. 2) Anxiety level for a long timeframe participant
ranges from passive to active. 3) Total mix of volume wilJ be a blend
of these circumstances and will affect the market's structure accordingly.
IV. Regardless of whether prices are in an excess, or are facilitating
trade in the short timeframe, a market-created opportunity which is
attractive to a long timeframe buyer wilJ not be attractive to a
10 MARKETS AND MARKE T LOGIC long timeframe seller. Thus, desire for
participation for a long-term buyer and a long-term seller are opposite
at the same price, at the same time. Therefore, long-term buyers almost
never buy from long-term sellers. Thus, no market exists which is
composed solely of long timeframe participants trading with one another.
V. Where prices are facilitating trade and are thus fair in the short
timeframe, a price or price area which is attractive for a short timeframe
buyer will be attractive to a short timeframe seller. VI. The normal
trading pattern has the short-term trader transacting business with the
long-term trader, yielding various buyer-seller combinations: long timeframe
versus short timeframe. Each combination transacts business in varying
quantities throughout the structure of the range. VII. Participants can and
will change their timeframe depending upon the situation as it relates to
their needs. The effect of this is to increase or decrease market
activity. A) Long timeframe participants, when they decide to abandon
their posture of only trading with an advantage and trade in the short
timeframe, become short time frame participants because their needs and
goals as expressed in market activity become identical to those of other
short timeframe participants. This increases market activity. B) Likewise,
when long timeframe participants extend their timeframe, market activity
is decreased. Further, when a long timeframe participant passes up a
market-created opportunity, market activity decreases. C) When the short
timeframe participant lengthens his timeframe, he becomes a long timeframe
participant, decreasing activity. D) When the short timeframe participant
shortens his timeframe, activity increases. E) Regardless of timeframe,
those who have initiated positions in nonconsuming markets may look to
exit the positions over either timeframe. This concludes the presentation.
in outline fonn. of the logic. operational procedures and the characteristi
cs involved and inherent in all markets. While there are many diverse fonns
of markets. all adhere to the logical principles as presented in this
outline. The operational procedure s may not be explicit to the untrained eye
in certain marke ts. and minimum and maximum timef rames vary greatly depending
on the particular market. But neverthe less. every market is governed with
the logical and operational procedures and displa ys characteri stics outlined
above. From these principles. one can develop and employ tools with which
to read and understand the market. providing the infonnation from which to
act in a logical. well-thought-out and consistent manner.

3 SOME THOUGHTS ON THE RANDOM WALK AND EFFICIENT MARKET THEORIES T here are
a select few who regularly profit from their involvement in organized
markets, and there is the great majority of people who do not. Among the
points which distinguish successf ul traders and investors on one hand
from the vast majority of market participants and most of the academic
community on the other, are the acceptance by the latter group of the notion
of organized market s as a random walk, and the ability to distinguish
organized from unorgan ized markets because of the so-called "efficient
market" theory. The most important - yet simplistic - implication of market
logic is that anyone can now locate value in an organized (or in fact any)
market. Thus, one can determine when price is below value, at value or
above it. Armed with this information, so long as one has the other requi
site character istics, one can join the ranks of the few who make money consi
stently in the organized markets. A secondary implication of market logic
must therefore be that it refutes both the random walk and efficient market
theories currently in vogue among the majority of the academic community.
Consider each of these long-accepted theo ries regar ding market activit y.
Random Walk The theory of price fluctuation as a random walk (and the term
itself) has been used for centuries. There are numerous definitions of
random walk, and each definition varies in shades depending on who is doing
the defining. According to Robert Hagin 's Dow Jones-Irwin Guide to Modern
Portfolio Theory, random walk is a term used in mathematics

12 MARKETS AND MARKE T LOGIC and statistics to descr ibe a process in which
successive changes are statistically independent. A random walk implies
(that the market's price displa ys) no discernible pattern of travel. The
size and direction of the next step cannot be predicted from the size and
direction of the last or even from all previous steps. The serial
correlation is (func tionally) zero. In other words, the random walk
theory holds that it is impossible to predict tomorr ow's price changes
based on what has occurred today. One of the central points developed
throughout this book is that all markets operate simila rly and are motivated
by the same principles, and that anyone who can understand these principles
- plus observe and record the individual characteri stics of the specific
market - and can employ a sound trading strategy and discipline himse lf,
can profit handsomely from any market. Thus, a central thesis of market
logic is that there is little distinction between organi zed or exchange-
traded markets such as stocks, futures, options, etc., and all other so-
called "unorganized" markets where no federally regulated exchange floor
exists. (Certainly the exchange-traded markets often offer a narrower bid-
ask spread, thus creating a higher degree of liquidity and hence lowering
transaction costs as compared to those of unorganized mar kets.) Every
market is an auction market, either passive or active. In a passive
auction, the individual does not take part in an active negoti ating process
but selects from products offered at different prices which make up the
range. In an active auction, particip ants negotiate the range . Whether
the auction is passive or active, all markets •• auction" or trend up and
down in order to fulfill their purpose, to facilitate trade. In an auction,
prices do not develop randomly, but rather to fulfill the purpose of the
auction. The purpose of any market is to facilitate trade. Lack of trade
facilitation inevitably causes price to move. This price movement behavior
is as true in the organized markets as it is in a grocery store or any
other everyday market. Thus, price changes to satisfy the condition of
the market and every price is a result of the condition of the market . The
fact that price moves for a specific reason further precludes price from
developing in a random manner. Furthermore, prices are not statistically
independent of each other. Price, in moving to satisfy the condition of
the market, provides an informational flow. In other words, markets must
generate trade, and in doing so, prices fluctuate, generating information
about where trade is being conducted and where it is not. This information
is valuable to the market participant, as we shall soon demonstrate. 1
But true randomness does not generate valuable information. In other words,
in statistically random situations, knowledge of the present is not impor
tant, for it conveys no advantage. If knowledge ofthe present structure

THE MARKE T'S PRINCIPLES 13 of a market is important and does convey an

advantage - as we shall see in later chapters - a market cannot be a
random walk. We shall see how, in a futures market, the day's activity
is structu red; price moves because of the degree of each timef rame's
participation at various levels of price. We shall see why the ultimate
structure of a futures market for one day depends on the activity level of
the various groups. We shall see that the market develops logically, as price
fulfills the need of the market . And, we shall see that prices can be
distinguished from one another yielding valuable information. Efficient
Markets According to Robert Hagin, The efficient market theory is the
assertion that in a market with numerous investors who prefer high returns
over low returns and low risk over high risk, "information" is of no value. An
investor can attain no more nor less than afair return for the risks
undertaken. In the semi- strong form, the efficient market theory hypothesizes
a market in which all publicly available information is efficiently
impounded on the price of a stock, and hence a market in or item of
publicly available inform ation that can be used to predict future price
change s. An efficient market does not allow price to get away from value,
since the theory holds that inform ation is of no value since it is factored
into the market, as every price must represent fair value . If price is
always in equilibrium of value, then the theory presumes that prices are
indistinguishable from one another in all but number. Thus, according to the
efficient market hypothesis, all prices represent value, and the market is
balanced at every moment; all the needs and concerns of the entire marke
tplace -- participa nts in every known and unknown time frame -- are brought
to the present by a price representing value for all. This seldom occurs
and when it does, it is happenstance, and nondiscernible except by the
lack of activity. Different participants have different timef rames for buying
and/o r selling; longer timef rame participants seek to buy low and sell
high, and short timef rame participa nts must transact sooner and cannot be
as discriminating. Thus, all markets - including organized markets - are
ineffic ient from the standpoint that participa nts with differing time
frames view the most recent price with differing opinions and do not
participate at the same time and at the same price. In other words, a
given price is not viewed as an equal opportunity for all. The market cannot
at any one moment balance all the needs and concerns of the entire
marketplace - participants in every known and unknown time frame - since the
most recent price does not represent the same thing to all participants. In
other words, no single price represents fair value

14 MARKETS AND MARKET LOGIC fo r everyone. 2 Rather than being efficie

nt, all organized markets are effective. They are effective from the
standpoint that they produce and regulate trade, bringing into play all
participants over time. In other words, the market facilitates trade from
all participants, not with each individual price, but over a large sample
size. The fact that participa nts with different time frames exist
precludes a price dominated by one time frame from being fair value for
all. The effici ent market hypothe sis overlooks the existence of participant
timef rames. The assumption of randomn ess and the "efficient market hypoth
esis" assumes that the market -- price movement over time -conveys no
knowledge or information. Instead, it assumes that if a trader profits from
a market, he has resorted to predicting, and his luck will sooner or later
run out. However, one need not predict the future in a market of uncertainty.
It is impossible to always accurately predict future events. But we can
monitor the market, understand its present condi tion, and how current
price relates to the market 's current asses sed value, and from thi s, we
can,logically deduce probable behavior, and adjust our assessment from the
new information the market provides as it unfolds. And by extracting bits of
market-generated informa tion, we can deduce and change. The Academic
Community's Ball and Chain One rule that most successf ul individuals and
businesses have incor porated into their operating procedure is not to pursue
any endeavor in which they face a disadvantage before correcting those
things that create their disadvantage. In other words, it is important to
continually assess and reassess what is producing succes sful results,
discarding what does not yield success. Yet, the academic community
continues to pursue the refinement of studies based on fallacious
assumptions about the market, particul arly the random walk and efficie nt
market theori es. Gaining knowledge from exper ience has not been practiced
by the academic community, not out of malfeasance, but because in modem
society knowledge can more easily be gained from a formal cl assroom
teaching env ironment . Instead of examining reality, rethink ing fundamental
market assump tions, and seeking a new course of thought such as is introduced
in this book, the academic community continues to pursue the disadvantage as
taught in the classroom. This is not meant to be a pedantic indictment of
the academic mindset. Clearly, it is difficult in most institutions to
gain a true evaluation of reality. It is even more difficult within an
institutional setting for the status quo to change, regardless of whether
what is accepted is correct or not. The academic community is not guilty of

THE MARKE T'S PRINCIPLES 15 an ything worse than not taking a leadership
role in thinking logically about marke ts. But times have changed. 1 Those
who understand the condition of the market (where price over time is building
value) are conveyed an advantage from which they can profit whereas those
who focus on prices against each other must assume randomness and no
underst anding. (This will be explained and developed in the ensuing chapte
rs.) 2 In order to understand the market's inefficiency, consider the reality
of how markets function. A normal preoccupation of the short time fr ame
participa nt is to focus on the dominant concern or news focus. The dominant
concern causes the market to be balanced in the eyes of the shortest timef
rame participants. It is the short timef rame partici pants who norma lly
transact the vast quantity of total volume. But while the short timef rame
participants transact up to 90% of the volume, their presence does not
change the market. Thus, this domi nant concern may or may not be a domina
nt concern for the longer timefr ame participants, since it may or may not be
of major signifi cance to the supply and demand situation in the framework of
the total market place. It is the focusing of the short timeframe participants
on a relatively unimportant piece of news, a dominant concern that is not
of major significance, that causes price excess. In other words, a minor
piece of news - a fact or perception that might be only 2% of the total
timeframe decisions of the marketplace - will motivate 80-90% of the day's or
week 's trade, since the short timef rame participants, who are the majority
of the market, focus on it. Their preoccupation can create an opportunity
when it is considered an excess for the longer timef rame participants. This
leads one to wonder, how can all prices be equal, and how can all prices
represent value when short timef rame over compensation presents an
opportunity for a more realistic valuation in a larger timef rame? (These
terms and concepts will be explained and developed in the ensuing chapte rs.)

4 COMPONENTS OF A MARKETPLACE REFLECTIONS ON THE FIRST TWO BASIC

OBSERVATIONS T he principles outlined in the second chapter and the fOlm
in which they have been presented are admittedly difficult to grasp at
first blush. Anyone who might be intimidated by their place ment should
have skipped over them during his first reading. To help explain and aid
in an understan ding of these concepts, the following three chapters will
illustrate the principles espoused in the outline by taking a step back
from the theor etical and presenting concrete reality . Once the reader
feels comf ortable with each principle, it is recom mended that the Chapter
2 outline be read and reread until it is fully understood and no longer
intimidating. The goal of this chapter will be to provide a primitive and
intro ductory examination of markets. This should begin to clear up several
misc onceptions about the function of markets which have caused great
confusion. By illustrating several market principles in a simple and
easily compr ehended situation, each reade r's basic understanding of
markets should be reinfor ced. The following will point out that while all
the details of market principles may not be fully understood yet, each
consumer does in fact already have a subconscious market understanding,
which allows him to fulfill his everyday needs. It is this unconscious
understanding which is each individual 's foundation for building a more
complete knowledge of any market. Price and Value Most investors and traders
distinguish between understandable market situations where price and value
differ, and the organized markets,
THE MARKET 'S PRINCIPLES 17 where price and value are always the same.
Unknown to most participants, all markets -not just the unorganized,
everyday markets -- have a universa l commonality: price and value differ in
all markets, and the underlying principles which motivate buying and selling
are identical. (Most investors and traders in organized markets inherently
understand this, but it was most notably presented in G raham and Dodd
's Securities Analysis. ) Further, every market reflects the collec tive
needs and goals of its participants through its range of activity. In order
to understand any marketplace, one needs to separate and isolate that part of
the range which motiva ted the activity of each category of participant. But
while most market examinations begin by focusing on the participants, a
true understanding of market logic necess itates taking a step back and
examining and understanding the real purpose of a market, and the importa
nce which knowledge of this purpose has in all market understanding.
Understand ing the purpose of the marketplace is the key to being able to
benefit from it. However, it is very easy to be misled and confuse the
outward results of the marketplace - that price is rationing supply and
demand - with its purpose, the reason it exists. The Purpose of a Market A
marketplace exists solely to facilitate trade. This is its only purpose. And
this fact is the starting point and a key concept to grasp when analyzing or
participating in any marketp lace. As mentioned above, to understand any
market place one also must grasp the needs and goals which motiva te its
participants. In a marketp lace, the needs and goals which motivate
participants are expressed in their continued buying and/o r selling. Thus,
observing and reflecting on the inherent needs and goals of a participant
aids in gaining a market understanding, but observing his market participation
- his buying and selling agenda in the marketplace - provides valuable
information, which is the foundation fo r an accurate market under standing
and for buy-sell decision making. Comprehending why it is true that markets
exist solely to facilitate trade, and the remaining logical principles and
consider ations behind every market, is made easier by consi dering the
situation of a single producer and a single consumer who transact trade
prior to the existence of a centralized marketplace, then as a
marketplace is developing, and once again as part of a large and complex
market place.

18 MARKETS AND MARKE T LOGIC Prior to a Marketplace Where no centralized

marketplace exists, so long as there is a product and a need for a product,
there will of course be trade. In other words, a single producer and a
single consumer can transact business. In doing so, they make a market,
but not a true market place. Without a market place, a very provincia l
and inflexible situation exists for both sides of the transaction, namely
the buyer (consumer) and seller (prod ucer). Only a limited flow of
information is available. Further more, that information is not circulating to
either producer or consumer in an effective manner. This situation leaves
the consumer less informed as to the costs and benefits of the product - how
much it should cost and how it may satisf y his need, etc. Theref ore, he
is in a weak position to fulfill his primary goal: to buy enough of the
product to satisf y his need as inexpensivel y as possible. To fulfill his
goal, he needs to evaluate the product in terms of its usefulness, consider
what possible substitute s exist and weigh any other information vital to
determining value. While every consumer has a different need, every producer
has the same need: to stay in business by selling his product. Since a
pro ducer 's primary goal is to maximize profits, he is always seeking to
determine the price where his profits are maximiz ed and adjust likewise.
For instance, he would gladly produce more at a lower price if, in doing
so, he could sell more and receive per-unit savings through economies of
scale, passing on only a percentage of these savings to the consumers. In
doing so, he would fulfill his goal of maximizing profits. But where no
marketplace exists, the producer does not gain needed information from a
transaction. He would like to know how the product meets the consumer 's
individual needs over a range of prices. In other words, is he selling
the product at, above or below value for the majority of potential
customers? Without a location where his product can be compared with others,
the producer cannot better his marketing situation by improving or repricing
the product, because he doesn't have enough inform ation about how the
product could be selling in a competitive situation. Furth ermore, without
a market place, there is no timef rame during which the consumer can indica
te whether he wants more or less of the product at a given price. In
short, there is no efficient way for the producer to increase his
business - to facilitate trade - without a marketp lace. Even a contract
between a buyer and seller to transf er goods for a fixed price at regular
intervals does not facilitate trade or information in the way that a marketp
lace situation does. While the contract may be beneficial to the interests
of both parties when they enter it, there

THE MARKET 'S PRINCIPLES 1 9 is no flexibility and no way to expand trade

other than by communi cating with. each other. A contract aids the situati
on, but it does not facilitate increased trade, only the amount that is
warranted at the time the contract is negotiated. Coming back to our
situation, both the producer and the consumer wish to improve their lot,
since they are fundamentally self-interested individuals who want to satisf
y their needs and fulfill their goals. Indeed, one cannot easily find an
example of a product manufacturer or distribu tor in any free economy who
does not wish to do more business .... to facilitate more trade. Unable
to improve their lot, both parties are frustrated without a marketp lace.
They need a more effective communication and distribu tion system in order
to satisfy their particular needs and goals. They need an arrangement or
entity which will facilitate trade. Develop ing a Marketplace Both the
producer and consumer realized that a lot more of the goods and services
could be sold if potential customers were aware that goods were regularly
for sale at a certain time at a certain place. This would benefit the
producer by fu lfilling both his need to stay in business and his goal to
maximize profits. At the same time, the consumer would be able to satisfy
his personal need and would be in a stronger position to meet his goal of
fulfilling his need as cheaply as possible. At some point the two arrange
to meet regularly at fixed time intervals in order to determine if an
exchange of the producer's product for the consum er's currency can take
place. A marketpl ace is born. With such a meeting agreement, increased
communication and product distribution can now take place. As a springboard
for fulfilling both parties' needs and goals by facilitating trade, the
market place soon becomes a reliable institution. More goods can be examined,
compared and ultimately purchased by the consumer, while more goods can be
produced, competitively priced to maximize profits, and ultima tely sold
by the producer. Both consumer and producer are provided a range of
opportunities to act or not act upon, a situation where competition
dictates value. A marketplace provides the ability for both parties to any
transaction to satisf y their need and maximize their goals at the practical
level of reality through increased trade and competition. Thus, a marketp
lace always selVes both the producer's and consu mer's needs, and is by
definition required to do so if it is to flourish. Indeed, without the
need to facilitate trade on both sides of the producer-consumer equation, no
market place can survive for long. In other words, transactional volume in a
market place will dry up when that marketplace does not meet the needs of
both producer and consumer while allowing every participant

20 MARKETS AND MARKET LOGIC to maximize his goals. A marketp lace has a
centralized location, regular hours, dependable participants and, most
importantly, it fosters competition among both producer and consumer and
is therefore expandable. A Mature Market The mature marketp lace may take the
form of a franchise, a distribu torship, a series of franchises or
distributors hips, a jobber network or one or a series of wholesale or retail
outlets, or, of course , an organized exchange where stocks, futures, and/or
options are traded. Regar dless, a mature market place continually seeks to
facilitate trade, thereby allowing producers to maximize profits and
consumers to fulfill needs. A mature marketplace expands the distribution
of goods, allowing more business to be transacted. Both producer and
consumer know they can conduct a varied quantity of business at a mature
marketp lace, should they choose to, given prevailing prices. Thus, the
form or structure of a marketp lace is not important, so long as the
mature marketplace meets the location, time, participant, and most impor
tantly , the competition requirement s. If it does, both parties benefit
from the market place 's existence, since they can use the information it
generates to facilitate more trade . The most valuable service any marketp
lace provides involves gener ating and dissemin ating information. That the
marketplace is an informational source is illustrated by consi dering any
and every type of market place, but especially an auct ion house. For
instance, the noted aution houses Christie 's and Sotheby 's market art,
antiques, collectible s, and any other objects in limited supply. The format
for marketing, the auction, is a type of market place. The purpose which
causes clients to come to these house auctions is the same as in every
market, not to ration supply and demand, but to facilitate trade in the market
- the art, antique and collectibles market. The first step toward conducting
a successf ul auction of this type includes advertising and promoting the
products to be auctioned to the target market, the art, antique or
collectibles world. The art world recognizes the value of information on
past art transactions for similar products, and weighs it in deciding
reasonable expectations for future value. Thus, past auction results -
transactional information - are researched avidly by all participa nts prior
to the next auction. The transactional informa tion provided by an open
auction market serves as valuable information for both potential and actual
buyers and sellers. After the fact, the auction results are published and
distributed. The transactional data reflect the condition of the market while
serving as an advertisement to facilitate more trade, possibly bringing more
works of art out into the market for sale or attracting more collectors
as

THE MARKET 'S PRINCIPLES 2 1 buyers . Those wishing to assess the market for
their personal collection now realize that its value has gone up or down
or stayed the same, depending, of course, on the prices comparable works
fetched. Again, there is a desire on the part of the auction house and the art
community to transact more business. They are enabled to do this because
they have inherent mark etplaces. Conclusion The major goal of this
primitive and introductory examination of markets was to clear up several
misconceptions about the function of markets which have caused confusion.
Two very significant points have been clearly illustrated: whether it is
an organi zed, federally regulated financial exchange, an open air food
mart, or anything in between, the sole reason any marke tplace exists is not
to ration supply and demand, nor to allocate scarce resour ces, but simply to
facilitate trade. Furth ermore, all functioning markets generate information
while advertising opportunity. Any logica l understand ing of any market must
begin by acknowledging these fundamental principles of every market place .

5 COMPONENTS OF A MARKE TPLACE RELE CTIONS ON THE THIRD AND FOURTH BASIC
OBSERVATIONS T he goal of this chapter will be to provide an understanding of
the components the marketpl ace uses to facilitate trade, advertise oppor
tunity , and generate information. Every marketplace functions with four
compone nts: the product and the interests of the producer-p articipant, the
need on the part of the consumer-participant, price, and time. The Product
and the Interests of the Producer-Participant The product must satisfy a
need, or else be packaged or marketed in such a way as to persuade the
participants that it satisfies a need. The producer is a self-interested
individua l whose need is to remain in business and whose goal is to
maximize profits. He wishes to facilitate trade in his product in order to
determine the price at which profits are maximized. The Need on the Part
of the Consumer-Participant Consumer-participa nts have their own individual
purpose for using the market. These purposes are many and varied and in all
but the most organized markets, they reflect the consumer 's need for the
product. The participant 's goal is to fulfill his need as cost-ef
fectively as possible and to determine' the quantity of purchase needed to do
so. Every product has a value in the mind of each consumer. In estab
lishing the produ ct's value, each consumer weighs the product's costs and
benefits through time.

THE MARKET 'S PRINCIPLES 23 Price Price, the market component most
participants rely on when making trading decisions, is the amount of money
given or set as consi deration for the sale of a specified item. It is a
variable and, as such, it fluctua tes. Price facilitates trade by balancing
the market, making the situation fair for both producer and consumer over
the very short fUll. The market, in facilitating trade, uses price to
promote activity. Price does this by advertising oppor tunity, moving up or
down in order to make the market attractive for participants to enter.
The market continually uses the shifting or vacilla tion of price between
the area where it encourages buying (consuming) and where it encourage s
selling (prod ucing). Price, endlessly promoting activity through adverti
sing oppor tunity in the market in an effort to facilitate trade, does so by
testing excess levels. However, the market has little or no trade activity
when price moves either to too high or too Iow an excess. Thus, when price
moves either too low or too high, it does not facilitate trade and
must eventu ally change. To prevent price from moving too extensively in one
direction, the marke tplace has "hidden brakes," namely the self-interest
of the participants. If price becomes unfairly above or below value, one of
the parties to the producer-consumer equation will not trade or will trade in
decreasing volume . For example, as price moves up, it adverti ses oppor
tunity to producers, but may be in an area where the consumers will not buy,
or will buy grudgingly and in smaller volume, thus forcing the producers
to lower price over time. The promotional ability of excess price and the
hidden brakes inherent in every market place can be illustr ated by a
business custom existing in most Western culture s, the "post-holida y sale. "
During this period, most department stores substa ntially discount
merchandise not sold at regul ar prices during the holida y season, which for
the retailer is the period of greatest inventory demand, due to a great
supply of buyers . Store management realizes that after the holiday
season a shortage of buyers exists, and merchandise not sold at regular
pre holiday prices will not move quickly. The retailer's primary goal
throughout the year is to be quickly rid of slow-moving inventory which
is costing interest, storage and insurance while always increas ing liquidity.
Hence, merchandise is repriced downward:. Furthermore, merchand ise will be
sold only if repriced at enough of a discount to attract so-called bargain
hunters . 3 Thus, every post-holiday sale is a mark et's use of a "purpose
(low excess) price " designed to move old inventory not sold during the
holida y season. The retailer is willing to promote his leftover inventory
through an excess low price, since only the excess price reduction will
accomplish the goal.

24 MARKETS AND MARKE T LOGIC As for this market 's hidden brakes: Shoppers
perceive these new lower prices as bargains because for the months
leading into the holidays, these same items cost much more. For example, a
shirt which had sold for $50 for the previous nine months, offered after
the holida ys for $25, gets participa nts to react. They realize they're
buying price below the value established over the prior months. (Thus,
shoppers have an association of price over time equaling value, not as an
acknowledged and articulated principle, but rather as a perceived, almost
unconscious insight.) The hidden brake which prevents the shirt from selling
for $10 is the self-interest of the retailer, who assumes that 50% off will
be as much of a price excess as he needs to fulfill his goal in the time
allocated. Thus, while low price excess attracts consumers, high price
excess attracts producers. Another example of price excess promoting
activity - this time a high excess and hence promoting activity among
producers - can be seen in land values and prices hotels can charge when a
new demand for hotel rooms is created. The management of seasonal motels
located in resort areas expects strong demand which allows charging the
highest prices only during the seasonal periods. Illustrated in chart form
(the price charged per room against time), these seasonal periods represent
the market high and a brief time relationship as well, while the
remainder ofthe year, the "off seaso n," represents the lower average price.
Suppose that a major amusement theme park opens some miles away, creating
vast demand for nearby hotel space. A lone hotel next to the park is now
able to charge twice what the above motels charge during the off-season, yet
still remains fully booked. This high or excess price charged by the lone
hotel is providing informa tion to competit ors. This information will
inevitably promote activity in land values around the resort park, since
vendors of resort-related services envision substantial profits, profits the
lone hotel is making. Thus, high prices attract more (producers) sellers,
who buy up land (at higher values) and build hotels. The so-called hidden
brake s, the self-interest of the hotel guests, are such that as increased
hotel space becomes available, assuming a fixed demand, prices will fall
and the excess price charged by the lone hotel will soon be lowered to
maximize profi tabili ty. Thus, one of the most important insights that
the inf ormation provided by a marketplace will provide to both producer and
consumer is that activity is being shut off at a certain price. This is a
signal that price is not facilitating trade or promoting activity and that
this level should be offered only for a short period of time and thus is an
excess and can be expected to move. For example, when a new, higher price
produces a substantially lower level of activity, it signals to the
producer that, for the moment, a lower price (or a corrective marketing

THE MARKET 'S PRINCIPLES 25 strategy such as advertising, etc.) is needed

if sales of the product or service are to pick up. Simil arly, if the
producer, for whatever reason, lower s the price beyond the point where he
can make an equitable profit, he will soon shut off the availability of
the product at the unreasonably low price and will raise the price. Time
Time, the market component few participants rely on when making trading
decisions, illustrates the degree of change between need and price in the
marketpl ace. It is a known constant, a measur ement which parti cipants
inadve rtently use when determining value through trans actional data. Time
impacts trade by regulating the duration during which buying (consumi ng)
and selling (producing) can take place. The market, in facilitating trade,
uses price to promote opportunity and uses time to regulate it. In other
wor ds, the market uses time to regulate how long a given opportunity will be
available, insuring that when price promotes opportunity to the point of
reaching excess, that price is held in check. The market continually uses
time to regulate itself throughout its structure . In other words, time
at a given price yields volume, which the market equates with value.
Everything else being equal , the more time at a price or price area, the
more trans actional volume, and the more value. Examples of how time
regulates price activity are illustrated in both the examples previously used
to illustrate how price promotes activity. In the post-holiday sale, while
the department store management was willing to sell at prices half of
those charged prior to the holidays, management was not willing to offer
this ' 'below value" opportunity for long, but only until the current
inventory is sold. Had the store extended the opportunity to purchase
merchandise into what is con sider ed the regular shopping season, the lower
post-holiday sale prices would soon be considered the new value area. This
is something no ret ailer would want to see. Retail stores and other produc
ers/sellers use the lower excess price to promote activity only so long as
it fulfills the purpose behind the excess price. Inter estingly, the
sharper the price reduction - or the farther the price offe red is below value
- the shorter the time period during which the opportunity will be availa
ble. Likewise, the example of the resort hotel illustrate s that time
regul ates activity. In that example, higher price promoted activity among
producers, thereby attrac ting new hotel s. The high prices charged first
by the lone hotel and then by the new hotel market entrants were in
hindsight an excess which occur red only until the demand for hotel space
was met and exceeded. This activity (rising land values and hotel
construction) continued until it went too high

26 MARKETS AND MARKE T LOGIC (hotels saturate the demand) and activity at
the high prices was shut off. Thus, while the hotel near the resort park
could temporarily charge prices consid ered above value, the market's
excess promoted this opportunity to others, so that the hotel was not able to
sustain the high prices and low vacancy status for long. Thus, through a
long time frame, time regulates the high price activity and controls it.
Both consumer and producer are interested in generating the maxi mum amount
of activity at the most advantageous price possible. Thus, in reaching a
balance, the market will produce extremes in the marketp lace that will not
hold over time, since they will be attract ive for one side, but not attrac
tive for the other. In order to balance, the market needs to go too high and
too low to find an area that is fair for both parties over a period of time. It
is these excesses on both sides that give the market its natural
organization and provide information to participants. When changes in price
occur that are so small and subtle that activity is not shut off, there is
no excess in the marketplace, and the market is in position to trend or show
slow and consis tant continuation. Thus, from a relative standpoint the market
is either going to be working with excess or operating with slight, subtle
changes. Conclusion The components which combine to make up a market place
interact as follows: the marketplace controls and regulates itself through
its allocation of price and time, yielding types of natural organization
which, in producing excesses to test market acceptance, produce balance
and provide information. The obvious conclusion is a major breakthrough for
anyone who understands market logic. The conclusion flies in the face of
the conventional wisdom which says that price is the only mechanism that the
market uses to balance or ration supply and demand. (Introductory economic
theory asserts this, econometric models are built assuming it, and many
investors and traders have experienced setbacks believing it.) However, when
partici pants focus on price and price alone, they simply cannot have a
market understand ing. Thus, an analysis of a price versus price is
inherently narrowly focused and virtually mean ingless. 3 It is impor tant to
recognize that the retailer's action in of fering lower prices brings about
two events. First, a percentage of the short timef rame shoppers may
extend their timef rame and buy more than the usual quantity of shirts.
Secondly, those long timef rame shoppers who were uninterested in buying a
shirt at the normal price become motivated to buy at the lower bargain
price.
6 COMPONENTS OF A MARKE TPLACE REFLECTIONS ON THE BEHAV IORA L OBSERVATIONS
T he combination of a product plus self-interested individuals with a need
for the product, plus price and time, combine to yield market activity,
which represents the collective activity of all market participants. Market
activity is organized into a range of time-price opportuni ties. In other
words, a mark etplace does not offer a price, but a range of prices from
which the market participants can choose. Time-price opportunities are the
basic units of measur ement which make up and define market activity, displa
ying any and all changes in the marketp lace. Just as molecular activity is
made up of atoms, so is market activity made up of time-pr ice opportu
nities. However, these opportunities are undefined constant units of measur
ement which every market participant may define differently for each
market. A time-price opportunity is a point in time during which anyone may
act as either a buyer or seller at a specific price. Again, there is nothing
myster ious about such oppor tunities; they result naturally from price
promoting activity and time regulating activity. They are significa nt to an
understanding of a market because they allow the participa nt who examines
this variable against a constant to go beyond the seeming randomness and
unlock the natural organization of the market. Timeframes All market activity
is triggered by two considerations, market-imposed timef rames and parti
cipant timefra mes. Both market-imposed and participant (or individual)
timef rames are forcing points in time which

28 MARKETS AND MARKET LOGIC force or bring to the fore market activity by
participants. All trading decisions are influenced by both types of timef
rame considerations. Thus, timefram es collectively detennine time-price
opportunities in every mark et. Every marketplace has to service the timef
rame needs or perspec tives of every participant, producer and consumer
alike, which, as previously mentioned above, it does through participation.
One example of a market-imposed timef rame - and theref ore a known consta
nt and inflexible point which forces decision -making - is the hours during
which the marke tplace operates. A sense of organ ization and dependability
comes from regular marketplace hours, that time period during which trade
can be transacted. Participants must tailor their decisio n-making around
this time period. For exam ple, people often find themselves acting
differently near closing time from the way they act when that particular
forcing point is not of dominant concern. Other examples of marke t-imposed
timeframes include the date of the next Treasury auction, the anticipated
timeframe for a new tax measure, tomorrow 's weather, government estimates of
the new crop harvest, or the next model year's car. Market-imposed timefram
es - whatever they may be � force both producer and consumer into having
particip ant or individual time frames - points of forced decision-maki ng.
Thus, all participants in a market have independent timef rame considerations
which are not a known constant, but are flexible and will change as
advantageous opportunities are created and/or the individ ual's needs change.
Each participant 's independent timef rame is established by weighing his
perce ptions of particular short- and long-tenn need for the product, plus
his individual time horizon, against his expectations of the future
availability or supply of the product at the current cost, plus his current
and future ability to pay. A good example of a market-imposed timef rame,
a participant timef rame, and how the fonner influences the latter can be seen
in the setting of an auction market alluded to earlier. When Sotheby's or
Chr istie's auctions off a particular object that is in limited supply, the
market-imposed time frame for that item will be the auctionee r's call, " going
once ... going twice ... " fo llowed by the rap of the gavel. This is a
known and consta nt signal to participants, a market-imposed timeframe
which forces every potential buyer 's need or desire at the current price
to the surface, with the outcome being an individual decision made by
every participa nt on whether or not to raise the bid. An auction's market-
imposed timef rame influences the participa nt timeframe in that one either
buys during that timef rame or misses the opportunity. This illustrates how
marke t activity can change by the market timef rame overriding the
individual timeframe or the individual timeframe overriding the market-
imposed timef rame. There is more activity in the first, and less activity
in the second.

THE MARKE T'S PRINCIPLES 29 Timefr ames, whether marke t-imposed or

participant, are forward in nature , and range from the very short-te rm to
the very long-term. An illustration of a relatively short timeframe market
occurrence is the post-holida y sale alluded to previously. The sale
comes and goes within the span of a few weeks, and is thus but a small
percentage of the market 's yearly activity. In contrast, an illustration of
a relatively long timef rame market occur rence might be the lone resort
hotel which was able to charge a sustained above-value price due to the
increased demand brought on by the new theme park. Participants with short
timef rame perspectives differ from those with long timef rames, both in
obvious ways and in some ways not so obvious. The most obvious distinction
involves how each views time. Short timef rame participants deal only with
the immedia te future and the nearby, not focusing on the longer view. If a
participant must buy a new suit today, he must by necessity have a short
timef rame. Thus, he will compare value among those stores he can see
today, but he cannot wait until the next clearance sale before purchasing. In
other words, he cannot consider if he is purchasing below value in the longer
timef rame of the next six months, but must consider where the best value is
among the suits available today. He is looking for a fair price in today 's
timefr ame. In contrast, longer timef rames and partici pants with longer
time frame perspectives tend to di sregard the impor tance of the immediate
future, but instead try to place short timef rame market activity within
the context of the longer timef rame activity. For example, the indi vidual
who needs a suit in six months must buy a suit, but can do so at any time
within the next six months. He views the suit market from a long timef rame.
He will only enter the market when he finds a suit attractively priced,
meaning today 's price is sufficiently below the average price or value
in the long time frame. In other words, he is relating the short timef
rame market oppor tunity - it may be a " Spring Clearan ce" - to his
timeframe. In such a way, he judges that by taking advantage of the retailer's
short timeframe need - to quickly move suits not sold at higher prices - he
can buy below what is value over the larger timef rame. He is looking for an
advant ageous price. Aside from the difference between how they view
time, or how much impor tance they attach to recent market activity,
participants from different timef rames differ in that they focus on different
con cerns and buy or sell for different reasons. Short timef rame participants
buy or sell because they need to; long timef rame participants buy or sell
not because they need to, but because they can take advantage of price away
from value. It is significa nt to note that long timef rame partici pants
conduct transactions with those with shorter tim eframes, not other long
time frame participants. In other words, a long timef rame buyer is trying
to purchase used cars at a price below value. A long timef rame used

30 MARKETS AND M ARKET LOGIC car seller - one who is under no pressure to
sell - wishes only to sell at a price at or (more probably) above value.
The price at which the long timef rame buyer wishes to purchase is not a
price acceptable to the long timef rame seller at the same time, and vice
versa. Timefra mes determine when and at what price participa nts buy and
sell. And participa nts with short timef rame perspectives differ in their
buy-sell patterns from participants with long timef rame perspectives. These
two concepts are keys to understanding market logic. They should be
reviewed again and again until they are completely clear. The Importance
of Timeframes Understa nding the concepts of timefra mes and their influence on
the market is key because acknowledging them is necess ary to be able to
grasp the next concept: to the extent that one can isolate or separate out
and read the activity of the various timef rame influen ces, one can
gauge the strength or weakness of a market. In other words, in order to
understand the market, one should endeavor to understand the current
actions of the long versus short timef rame participants. This is why
participa nts should be isolated and categorized by the length of their
individual timef rame, their ability to remain patient in buying or selling,
in order for one to gain a market understa nding. For example, one should find
out whether the long timef ramers are predominantly buying aggressively from
the short timef ramers, whether they are liquidating, etc. At any one
time, any timef rame can be exerting the force that controls the market.
However, the greatest amount of activity in every market comes from particip
ants with the shortest timef rames. In other words, participants with short
timeframes dominate normal market activity, mostly because they must commit
to a position in the market much more than participa nts with a long timef
rame. Short timef rame participants do not have the luxury to wait for a price
away from value, they must wait merely for a fair price. Furthermore ,
participants with longer timef rames tend not to overcommit to the market
place and therefore do not play a domina nt role in day-to-day market
activity except at price excesses. In any futures market, for example, by
far the greatest majority of the trades transacted on a normal day (in the
area of 80%) are for immediate or short timef rame needs. The balance are
those trans actions of the longer timef rame , and are intended to be held
until the next day, the next week, or the next year. The same is true of all
other market places. On any given day in the supermar ket, for example,
perhaps only 15% of purchasing is done by the long timef rame
participants - those fulfilling their shopping needs for some item they do
not need during the next few weeks or months. The vast majority

THE MARKE T'S PRINCIPLES 31 of purchasing is done by the short timef rame
participants - those shopping for their needs fo r the day, week or near
term. However, when price falls to levels attractive to long timef rame
participa nts, the ratio of near-term to long-term timef rame activit y
shif ts, and with it, so will volume and ultimately price. To oversimp lify
somewhat, consider the distinction between the two situati ons: SITUATION 1
Short timef rame participants dominate market activity. WHY: Long timef rame
participants are absent because price · and value are near to one another in
long timeframes. SITUATION 2 Long timef rame participants in conjunction
with short time frame participants dominate market activity. WHY: Both are
present because short timef rame participants always exist and long timef
rame participants (either true long timef rame participants or short time
frame participa nts who have converted due to the opportunity) are attracted
because of a market-created opportunity - price is away from value over a
long timeframe. Situation 1 is illustrated in the suit buying example, where
the long timeframe participant has sufficient time in which to operate; he
will not make buy or sell decisions motivated by anything other than value.
Because he has sufficient time in which to operate, he will most likely buy
only when he can take advantage of excess price caused by another participant
focusing on maximizing his goals in the short timef rame. (When the long
timef rame trader passes up opportunities, he loses time and thereby shorten
s his timefram e perspective .) Situation 2 is illus trated in the discussion of
the fact that lower prices offered in the price excess known as "Spring
Cleara nce" motivated buying on the part of the long timef rame participant.
Thus, the reason clearance sales do not continue for a substantial portion
of time and yet generate a substantial portion of the total transaction
volume is that both short and long timeframe participants are actively
buying. Thus, when long timef rame participants buy, the market is either
perceived by them to be undervalued or they are forced to take
advantage because they believe they are missing the opportunity. And, as we
have also seen from that example, individuals with the shortest

32 MARKETS AND MARKET LOGIC timef rames do not have as many options open,
nor do they have as much time in which to think and act. Often they are
forced to buy or sell regar dless of the relationship of price to value
over a long timef rame. An example of this in an organized market place
might be the individual forced to liquida te a market position by a certain
time or day due to an inability to meet margin requirements. Thus, changing
the mix of timef rame participants is the only factor that changes the
condition of the market , increasing transactional volume and ultimately
moving price. Another example might be the supermarket which promotes
activity in a nonperis hable item through a sale. The transactional volume
of the reduced item is increased, since 10n lS timef rame shoppers are added
to the normal number of short timeframe shoppers (and many short timef rame
shoppers extend their timef rame, buying more than their normal quantity to
build an inven tory of the item), since it is priced below value. Price
must now shift upward, because the grocer is selling an increasing amount
of the item at near or below a break even price. The increased
transactional volume neces sitates his ultimately increasing the price to
balance the market. The greatest percentage of activity in a matket exists
to satisfy the near term - the hand to mouth needs of the short timef rame
participants - while the long timef rame activity dominates the market place
only occasionally. Yet it is the entranc e of the long timeframe participants
that changes the condition of the market and causes range extension or price
movement. It does so by upsetting the delica te balance that has been
predominant. Furth er, it is price excesses created by the short
timeframe participants which create opportu nities for the longer time frame
participants. Thus, participants in various timef rames compete against each
other, seeking to take advantage of one another. The long timeframe
participant takes advantage of price away from value while the short timef
rame participant exploits the complacency of the long timefr ame, thereby
forcing a change in his outlook. Thus, in order to have a market understa
nding, one must examine what long timef rame participants are doing and how
short timef rame participants are reacting. Hence, the challenge of
understa nding the market is to isolate, categorize and analyze the
activity of the diffe rent timef rame participants. How Changes in Price
Affect Value's Movement As we have seen, long-t erm market-imposed or
participant timef rames have a great influence on day-to-day market activity
only when price gets far enough away from value to make it attractive
fo r long timef rame participants to buy price below value or sell price
above value. Thus, it is price getting far enough away from value which

THE MARKE T'S PRINCIPLES 33 attrac ts longer timef rame participation and in
so doing, changes the condition of the market. But what happens when price
moves away from value, but not far enough to encourage long timef rame
participa nts to enter and take advantage of the disparity between price
and value in the shorter timef rame? Simply put, when this happens, the
conditions of the market do not change, and the new price becomes accepted as
the new fair value over time. In other words, when conditions do not change,
the market is in a position to continue its behavior. Some markets tend to
trend more than others because of the timef rame mix of the
participants. Contrasting the housing market with the oil market from the
very longest timef rame illustr ates this distinction. The U.S. housing market
has been in a trending market, representing a continuously higher
movement in value since the depression of the 1930s. Many areas have
experienced cycles where neighborhood housing values appreciated as much as
5% a year continuously for a decade. Why? When the velocity or increment
of price change is such that it does not change the behavior of market
participants, the market is set to trend. In other words, the higher prices
did not motiva te enough long timeframe homeowners to sell. Thus, the housing
market has been able to continue in a strong bull market only because
price didn't move far enough from value to change the situation for
participants of any timefr ame. The price continues to march on but never
gets out of line with values to the extent that owners are motivated to sell
in order to take advantage of price away from value. Thus, price slowly
and steadily leads values and value. This is able to occur in the
housing market because people have a need for their house other than as
an investment, and consumption of shelter is not easily decreased. But in
markets where the only need for the item is an economic need, and demand
is relatively elastic, markets do not trend as predictably for as long a
time. The price of oil over the course of the 1970s and 1980s, for example,
demonstrates price leading value over a long time frame, but value not
following, and instead pulling price back down - in other words, corrective
market action. Specifica lly, price rises in the 1970s were too dramati c.
The velocity of change was so great that it affected the behavior of
participants. The higher prices motivated enough long timef rame oil
producers to explore, pump, and refine, particularly when governments
provided tax incentives to encourage explor ation and greater produc tion.
The veloci ty of change also motiva ted buyers to cut back on their oil
consumption. The Western world started conserving energy as governmental
policy also disco uraged consumption. Both supply and demand were influenced
by the entrance of long timef rame participa nts motivated by factors tied
directly to the dra-

34 MARKETS AND MARKET LOGIC matic velocit y of price change, thus ending
the overpriced situation. The oil market was unable to continue in a strong
bull market because price moved far enough from value to change the
situati on, encour aging production of oil for many timef rame participa nts
while discour aging its consumption. Thus, a stable trend comes only with
relatively slow, relatively small incremental changes in which price moves
slowly enough to pull value along with it. While markets can accept or
digest a small price change over time, a relatively large price change
over time cannot be accepted or digested, since it encourages market entry by
those who have the power to end its acceptance or digestion. (Note: at the
top or exhaustion point of a trend, incremental changes do not come slowly
or in small doses.) Only those who have to buy (short timef rame participa
nts) will buy. Thus, activity must slow as long timef rame traders , who have
a choice, sell, rejecting price as too far above value. In order for a
trend ing market to stop and get market activity back to normal (a trading
range), price must move far enough in the trending direction to attract
long timeframe participants to stop the activity causing the trend (i. e.,
long timeframe buyers buying from short timef rame sellers). Volatility
Volatility is a much misunder stood market factor, but can be explained and
understood using market logic. It exists to a greater or lesser extent in
all markets. Each continually produces a series of boom and bust excesses,
vacillations which can be controlled or halted only by longer timeframe
participants entering or short timef rame participa nts length ening their
time frame. When there is diminished long timef rame influence (or when
the market is trading only in one timef rame), market activity is very
volatile. Thus, the volatility of a marketp lace -the measure of the degree
of vacillation between high and low in a market - is a function of the mix
of timef rame perspective of the participants: markets become very volatile
when participa nts are increasingly trading in the short term, the nearest
timef rame. In other words, the tendency for long timef rame participants to
shorten their timeframe triggers increased volatility, because their
ability to buffer the market is diminished. Illustrating volatility can be
accomplished within the framework: of a futures marketplace. You have
already read that price is used to promote activity and time contains
this activity. This means that as the market initially seeks an area that
facilitates trade, this area is bounded by other timef rame buyers and
sellers, each group responding oppo sitely to the market-created
opportunities present ed. As the market moves higher, it creates a selling
opportunity for the other timef rame

THE MARKET 'S PRINCIPLES 35 seller. At the opposite end of the range, lower
prices create a buying opportunity for other timef rame buyers . As the
response of either the other timeframe buyer or seller, or both the other
timef rame buyer and seller - the mark et's buffer from price moving too
drastically away from value - chang es, volatility will be greater or less in
one or both direct ions. Thus, the market is most volatile when the
condition of the market dictates that there is only one timef rame. In this
instance, as dominant participa nts initia te positions in the market, all
participa nts seek to initiate in the same direction, either buying or
selling, thereby causing wide, volatile price swings. In early market
development, in seeking to find the initial balance area, day timef rame
traders move the market directionally for the purpose of arresting the
momentum causing the directional impact. They do this to give the market
time for orderly trade. They are trying to find other timef rame traders
willing to respond to this excess, this market-created oppor tunity to
further impede the directional impact temporari ly. The response of the
other time frame trader will be sporadic throughout the remaining time
period. Lacking any evidence of trade of this nature , the market continues
to proceed, producing a much wider range in order to shut off this
directional impact more severely. This illustrates the second point: that
the market uses timef rame control in order to buffer the excess, and
failing this, the excess contin ues, increasing volatility. When all
participa nts are trading in a single timef rame, usually all act the same way
at the same time and tre mendous volatility ensues. The Dominant Concern By
definition, a free market allows any participa nt who wants to buy, to buy,
and any participa nt who wants to sell, to sell, regardless ofthe motive or
quantity . In order to be able to do this, in every market at any given
moment there is a dominant concern for the domina nt (almost always
short) timef rame, either producer or consumer partici pants, or both. The
domina nt concern is merely the news item that is the predominant focus or
preoccupation of the short timefram e partici pants. It is usually a news
event covered in the financial press and portrayed as the cause of recent
market movement. The dominant concern is thus viewed as the culprit, the
reason behind the recent market activity. But in reality, the process of
the short timef rame participant needing to focus on and neutra lize the
current dominant concern by definition sets the price area of the market. In
other words, the domina nt concern needs to be neutral ized in the shortest
timef rame as price seeks a balancing level for those partici-

36 MARKETS AND MARKET LOGIC pants who have to commit in the short tenn.
Price neutral izes the market's dominant concern at that particular moment,
facilitating trade by readjusting. In other words, the dominant concern must
always be neutral ized in the mark et's closest timef rame in order to
facilitate trade. Thus, the market is always making the situation fair to
both buyers and sellers operating in the shortest timef rame. For example, if
a sudden plethora of buyers enters the market because of a drought, Federal
intervention, etc., their reason s for doing so -or, if these are unknown to
the market, then the simple fact of their doing so - will be the dominant
concern that the short timef rame trader focuses on as he bids the market
up. The marketplace will continue to neutr alize the most recent domi nant
concern until price gets far enough away from value so that a new concern,
usually that of a longer timef rame , becomes dominant. These concerns can
be continuous in nature or opposite in nature. This is a balancing process
and is a part of the auction market process. In active auction marke ts, this
balancing process is often rapid and volatile. It is important to
acknowledge that news and other concerns motivate the short timef rame
participants, those who are the vast majority of a given day's, week's, or
mont h's transactions. In other words, in neutra lizing the dominant concern,
the market as a whole overweights it. Thus, it is often from short
timef rame participa nts focus ing on the dominant concern that the market
creates what is seen later as a temporary price excess. In other words,
while the domina nt concern is always discounted or neutral ized, it is
not always the concern of the long timeframe participants - those who
buffer the market from getting too far away from value. Formulating a
Market Understan ding Understanding market logic will help every
participant boost his likelihood of being successf ul in the market because
he will be able to read market activity and receive market-generated
infonnation, infor mation that few participants acknowledge or understa nd.
This infonna tion specifically relates to how the market is accepting or
rejecting higher or lower values over time. Here is the breakth rough upon
which all market understanding is based: regardless of the market - organized
or not - market activity is readable and can be studied and under stood. How
does understanding the composition of market activity, the concept of timef
rames, volatility, the dominant concern, etc., aid an individual in
gaining a market understanding by reading market generated infonnation? The
answer is, it does not - not without a framework from which to observe
how each element comes together to impact market activity. Such a framework
would allow any individual to break down market

p r I C e THE MARKE T'S PRINCIPLES 37 activity into group ings of

participa nt activity, that is, activity by the various participa nts as
distinguished by their timef rames. Once activity can be distinguis hed by
the timef rame of the participant who is active/ inactiv e, known areas
of opera tion and character istics of the various timef rame groups can be
distinguished. In other words, a sound framework for reading and analyzing
the market will allow any individua l to be able to isolate each of the
kinds or categor ies of participa nt by their timef rame, thereby being
able to distinguish type of market activity and to attribute conditions of
the market to the proper participants, thus reading the market and
understanding it. Such a framework employs normal distribut ion, the bell
curve, a tool which arranges and organizes data, presenting it in a
readable format. Arranging market activity in such a way is straightf
orward . The length of time being studied is broken up into equal time
units, each distinguished by a letter of the alphabet starting with A. Thus,
price is the vertical axis and time the horizontal axis. A Logical Framework
for Obser ving Market Beha vior Time A A A AI ABI AB II ABDEI ABDE G HI
BDEF GHI BDEIGH J BD EFGH J BDED GJ BCEF J BCF J BCF BC C A = 1st time
unit B = 2nd (equal) time unit C = 3rd time unit D = 4th time unit E
= 5th time unit F = 6th time unit G = 7th time unit H = 8th time unit
I = 9th time unit J = 10th time unit

38 MARKETS AND MARKET LOGIC An illustration of time-price opportunit ies and

of how they collec tively define market activity, providing market
information when arranged in a bell curve format, can be seen in a grocery
store which sells bread. During market hours over the course of every day,
week and month, a range of opportunities in time exist during which anyone
can act as a buyer of bread and during which the store is acting as
seller. Meanwhile, over the course of the month, week, and possibly the
day, a range of prices charged for the bread is shifting to accommodate
the needs and goals of the grocer. These changes in price are either accepted
or rejected by consumers depending on their needs. The result of these two
interests produce an area where the majority of trade takes place. For
example, at the beginning of the day, when bread is the freshest, the grocery
may seek to charge " top dollar, " whereas later into the day, the grocer
may be forced to reduce the price substa ntially if he wishes to unload
the day-old bread . To study the time-price opportuni ties in the bread
market over the very short term - say one day's activity - one could
monitor how many loaves were sold during each half hour time period per
one cent price change during the day. Over the very long term -say two month
's activity - one could monitor how many loaves were sold during each one
week time period per five cent price change during two months. Breaking
down market activity to its Price per loaf Sales of Brea d Loaves Over
Two Months 1.40 1 . 35 1.30 B 1.25 BC 1.20 ABC 1.15ABCG H 1.10ABCFG H 1 .05
ABCEF GH 1 .00 ACDEFGH .95 CDEF GH (in dolla rs) .90 DEFGH .85 DEFH A = 1st
week B = 2nd week C = 3rd week D = 4th week E = 5th week F = 6th
week G = 7th week H = 8th week .80 DEF .75 EF .70 F .65 F .60 .55

THE MARKET 'S PRINCIPLES 39 basics - a range of time and price

opportunities that are accepted or rejected by market participants - allows
one to examine market activity. In this example, exami ning time-price
relationships in the bread market yields informa tion (temporary in nature)
as to how the consumer has accepted the changes in bread price over
time as demonstrated in volume of transaction within the higher versus
lower price range. A Trader -Investor in an Everyday Market General ly
speaking, people succeed in satisf ying their everyday needs in non-organized
non-exchange marketplaces such as food and cloth ing stores. This is because
they make an effort to understand the particular market through the
information it transmits. In doing so, they enable themselves to generate
buy-sell decisions in a confident, independent manner. Yet few people are
able to satisfy their needs when involved in an organ ized exchange market
place, simply because people do not approach the more complex marketp lace
in the same way they approach the everyday marketplace; they do not feel
confident doing their own thinking. Every functioning marke tplace provides
information to participants as the market 's activity relates to their
particular needs. This informa tion is very useful and applicable to any
participant making buy-sell decisions, much more so than what could be
termed fundamental information, information outside market activity. In
other words, relating outside informa tion to the market with the hope of
generating buy-sell decisions is much more difficult than using the
information the market provide� to generate those decisions. However, the
informa tion that every market provides is usually ignored or misunderstood
when offered in the context of an organized exchange market place. Neverthe
less, it is pivotal to supporting deci sions which all participants must
regularly make in order to fulfill individual goals. This information
provides a known from which one must operate, using that known as what it
is - temporary information - while monitoring forward market behavior for
change. While this is very easy to do in simple marketp lace situations, it
becomes increas ingly diffic ult as the size and complexity of the marketp lace
grows and as one becomes a smaller portion of market activity. Thus,
the challenge becomes reducing collective market activity to bring forth
its organizational essence. The producer especially can gain value from
understanding market informat ion. In successfully marketing any product,
there are many safe pricing strategies to employ in order to stimulate
trade while maximizing profits. Repricing to maximize profits should be
done only when the market activity of the product is already known,
understood

40 MARKETS AND MARKE T LOGIC Situation Indicating Accept ance: A Price

Increase is Called For Number of units sold Price x 1 st 3 days 2nd 3 days 5
6 3rd 3 days 6 4th 3 days 7 Situtation Indicating Acceptance at 2% Higher
Price Numb er of cars sold in statisticai sample Price x + 2%X 1 st 3 days
2nd 3 days 3rd 3 days 4th 3 days 5 5 6 9 Situation Indicating Reject ion at
6% Higher Price Number of cars sold in statistical sample Price x + 6%X 1
st 3 days 2nd 3 days 3rd 3 days 4th 3 days 554 2 5 = 10,000 Assume that
this car dealer's sales reflect a statistical sample size of all dealers.
Assume that if this dealer sells five cars per three-day time unit, total
sales across the country will match production. In other words, at five
sales every three days, 10,000 cars will be produced and 10,000 will be
sold. and monitored. To understa nd market activity, one first needs to
monitor time-price oppor tunities, the amount of transactional volume that
occurs at each of the various price levels, formulated into a bell curve. An
Auto Example Consider the pricing strategy of a marketing executive of an
auto mobile manuf acturer, a market participant whose goals are set out for
him by a board of directors, company economists, etc. In imple menting a
program to carry out the board 's desires, he listens to and monitors his
market 's activity, gains a market understanding as it relate s to his
program , and monitors this fo rward, making any adjust ments necess ary to
fulfill his goal. This understanding of his mar ket will help him more
accurately repricing the product in order to sell the most cars at the
highest possible price, thereby maximizing the company 's profits. He is, in
essence, a trader attempting to manage his trade in the short term from
actual market information, and he is relying on the hope that the long-term
program of the board of directors (based on information outside the market)
is correct. When he com munic ates back to the board , he relates the market-
generated informa tion, not economic projections or his predictions.

THE MARKE T'S PRINCIPLES 41 If this executive is in charge of the marketing

department, he knows that so long as monthly production - say 10,000 cars - is
being sold, the company should raise prices in order to fulfill the goal
of maxi mizing profits. He devotes energy to analyzing their cars' time-pr
ice opportunities - the number of cars being sold at x price the first three
days of the month, versus the second three days, and so on. Are more cars
being sold every successive time unit? Are fewer? If more cars are being
sold every successive time unit to the point that total production of 10,000
cars is being sold, the market is showing acceptanc e of the specific model
car at x price. Therefore , the executive knows an increase in price is
called for. By monitor ing the information the market provides, the
executive is well aware of the market acceptance or rejection of the cars
at the particular price over time. The next month, after a 2 % price hike,
if the company 's distributors still sell 10, 000 -perhaps they might even sell
12, 000 - the marketing executive realizes that demand is strong , and price is
leading value. He knows that the company can continue to raise prices until
the market 's inform ation shows saturati on below the level of monthly
production in order to maximize profits. He decides to continue raising
prices every month, until the market 's inform ation tells him other wise.
The marketing executive knows that price will continue to lea d value so
long as price is facilitating trade. He seeks to take advantage of the domina
nt concern, which his research may indica te involves the need for a
moderately priced statu s car, or some other such variable. At some
increased price, however, the dominant concern will be neutr alized and a
new domina nt concern will surface. For instance, the realization may be made
by the consumer that the moderately priced status car is not necess ary. If
this is the case, the price of the car will have gone far enough away from
value that a new set of concerns becomes dominant. This might include, "For
the price, I don't really need to make a change. " Regardle ss, whene ver the
domina nt concern changes, the transactional volume of sales as expressed in
time-price opportunities changes quickly. Sure enough, after three months and
an overall 6% price increase, distributors can no longer sell 1000 cars per
three days, which in the past projected out to 10,000 cars per month.
Instead, the number of cars they are selling per three days drops to 900,
which pro jects out to only 9000 per month. The executive realizes that the
market does not appear receptive to higher prices by monitoring time-price
opportuni ties. The executive concludes that at this point the market is
not accepting higher prices as value and thus the product has been
overp riced for the recent environment. The executive had to price the car
too high to know the price had gone high enough. Once any marketer who
is monitor ing the market's inform ation overpr ices, he knows it and changes,
not waiting, but taking quick action. He realizes

42 MARKETS AND MARKE T LOGIC that the market informa tion is telling him that
price has reached the excess on the top side at the present. This information
is an absolute tempo rary known to the company. This process of monit oring
time-price oppor tunities at various price levels is conducted for every
car model by every company. Each company looks for the changes in
transactiona l volume that occur at the various price levels for each model
car, in orde'r to decide how much production should be alloca ted for each
model, given each compa ny's goal of maximizing profits. The assertions
made earlier about the role of price and time in regul ating market
activity apply equally to the car market example as they do to all markets.
Prices promote activity; lower prices promote increased buying activity
among consumers and higher prices promote increased production activity
among producers. Time regulates this activity. And price plus time equals
transactional volume, market accepta nce and value . For example, consumers
associa te the usual price charged for the specific model car with value.
Those who want to buy it below value will have a limited opportunity when
autos are on sale, characteri stically, when the next model is introduc ed,
thereby making the older model year less desirable. Distinctions among
Prices -- The Information Source Each of the examples introduced
demonstrates that all markets have an organizational structure which
regularly produces a wide range of prices and hence a wide range of time-
price opportunities. (It will be remembered that time-price opportunities
are merely measuring units which differ from one another in that they
denote transactions at different or similar prices, at different or the same
levels of volume.) Prices, and hence time-price opportun ities, can appear
with little, medium or a lot of a relative amount of time. Those prices
and hence those time-price opportunities that recur trade for a relatively
large amount of time. They result in relatively large transactional volume
and therefore display marlcet acceptance or value for both sides of the
market. They represent the marketplace establishing that time-price
opportunity as a fair value. Thus, the greater the duration at a price or
price area, the greater the value of that area. In contrast, those prices
and hence time-price opportunities which result in a relatively small
amount of time result in relatively small amounts of transactiona l volume
and display market rejection or unfair value for one side. Excesses of market
price promotion which result in a range of prices are simply normal over-
or underc ompensations the market uses to find balance. Thus, all prices
and all time-price opportunities are not equal, but can be distinguished from
one another in terms other than price. In other words, the variance
between

THE MARKET 'S PRINCIPLES 43 time-price oppor tunities, our defining measur
ement tool, is based on recurrence over time. Time-price oppor tunities,
and hence prices, can be either accepted over time by the market as
representing fair value or rejected over time by the market as unfairly
under- or overvalued. It is the time-price opportunities that are taken or not
taken or repeated due to current conditions that provide the participant
knowledge about the marketp lace. Thus, price, and hence time-price
opportunities, will be viewed in hindsig ht as either in excess or not in
excess. In other words, whether a price excess is rejected by the market
as unfair value or accepted by the market as fair value is an after-the-fact
known that becomes a reliable benchmark until changed. Using these princi
ples, the marketing executive for the auto manu fa cturer was able to read
the market 's preference of price based on transactional data. He compared a
range of time-price opportun ities, his measuring unit being the number of
the particular model car sold for x during each three-da y period. When
offered at the higher price, if the number of cars sold during this consta nt
measuring unit stayed the same or grew, the executive knew that the price was
being accepted as fair value over time, since the market was demonstrating
recurrence at the price. After another price hike, when the numbe r of cars
sold during the three-day period at a higher price began to fall, he was able
to comp are the recurr ence at the lower price with the non-r ecurrence at
the new, higher test price. He was thus alerted to a change in the
condition of the market at the higher price. In other words, he knew after
the fact that the change meant the higher price did not show equal recurr
ence. The increase of buying power versus selling power or the decrease of
buying power versus selling power will be displayed in the changing acceptance
of time-price oppor tunities. All market participants are continually looking
for an area to enter the market at a fair or advantageous price, yet as demons
trated, only the long timef rame participants have the ability to actually
change the condition of the market, since they only enter the market at
an advantageous price, thus causing change. Hence the market, in con
tinually searching for an equilibrium area, an area of fair value which
attracts the greatest participation and thus facilitates the most trade,
does so through the market 's process of creating excess while price is
advert ising and promoting opportunity. In other words, price needs to go
too high in order for the marketplace to know that price has gone high
enough. Likewise, price needs to go too low in order for the market place
to know that price has gone low enough. It was explained that market
activity provides market participa nts with vital known tempor ary information
units which reveal the collec tive needs and goals of other participants as
expressed in their use. As we have seen, time-price opportunities indica te
the mark et's trans -

44 MARKETS AND MARKE T LOGIC actional volume over a series of fixed

periods for a variety of prices. Thus, time-price oppor tunities (and hence
prices) can appear with a large or small relative amount of time. Those
time-price opportunities (and hence prices) which result in a large amount
of time also result in large transactional volume and display market
acceptance or value. On the other hand, those time-price opportu nities,
(and hence prices) which result in a small amount of time result· in
small amounts of volume and display market rejection or unfair value for one
side. Thus, by examining time-price opportunities, the grocery store owner
and the auto executive - and any participant of any market - can read the
market 's preference of the various time-price oppor tunities which occur
at different times, at different or the same prices at different or the same
levels of volume. This pref erenc e is market-generated information which
allows the participant to assess value. In other words, price plus time
equals market acceptance, which equals transactional volume, which equals
value. This is a definition of value which holds for all free markets. By
separating prices out as seen over time versus prices not seen again, one
can read the market 's collective expression of accepted, rejected or changing
value. The logical conclusion is that any participant in any marketplace can
now discriminate between prices, since all price changes are illustr ated in
market activity as time-price opportunities either accepted or reject ed. In
discrim inating, one can discover any change in the condition of market
activity over various prices over time. Viewing price movement over time as
such, market activity is readable in that present market activity is
monitored, and known informa tion is related to changes in such market
activity. This dictates the area where the market can facilitate trade at
the moment. Conclusion Thus, while most participants believe that all prices
are basically equal, an understanding of market activity allows an
understanding of the behavior of the market, i. e., the realization that all
prices clearly are not equal. The willingness of the participants to accept
one time-price opportunity over another represents a collective perception
of fairness or value in the marketp lace.

II. Illustrative Examples

7 ILLUSTRATIVE EXAMPLES OF MARKET LOGIC I n nonnal, everyday life, consumers

are constantly confronted with what they may or may not consciously
acknowledge as markets - but which nevert heless are marke ts. All markets -
everyday and organized - operate simila rly, in a manner explained by the
principles introduced in the Chapter 2 outline. These principles explain all
market behavior. Thinking consumers unconsciously operate based on an
understanding of many of these principles. These principles - the mark et's
logic, its operational procedures and its characteri stics - after being
presented in outline fonn in Chapter 2, have been individually discussed
and illustrated in examples in Chapters 4, 5, and 6. By now the reader
should be aware that all prices are not equal, all opportunities to buy o r
sell are not the same. He should know that markets provide infonnation
which indicates the condition of the market, and extracting and reading
this market-generated infonn ation is the key requisite to understanding a
market. These are insights many a consumer already has regarding everyday
market situati ons. In other words, before reading this book, many thinking
consumers already had an unconscious understanding of the principles this
book introduces in that they had the ability to understand simple,
everyday markets, although they may or may not have been consciously aware of
it. The value of understand ing the principles of market logic on a
conscious level lies in the realization that traders can now set up
specific parameters which allow them to consciously monitor and analyze
price versus value and the varied timef rame participa nts in the organized
markets , as they subconsciously do in everyday markets. The following
illustrations will introduce situations which can help

50 MARKETS AND MARKE T LOGIC the reader further develop an understanding

that all markets act similarly and all market situations are caused by the
same forces. They will also help the reader develop his understanding of the
other market principles, enhancing his ability to read the activity of
the various participant timeframes, allowing him to understand on a
conscious level any market situation. Observing Market Participation in an
Easily Read Mark etplac e As has been discussed, all of us as market
participants have our individual needs and goals which guide our timeframe
perspectives and thus our activity in the market. We generally understand
our needs and goals in everyday market situations, are able to distinguish
between various opportunities which may fulfill those needs and goals, and
are able to decide between opportunities by generating decisions con
fidently. Succes sful traders and investors are able to operate the same way
within organized markets, applying knowledge of their individual situation,
assessing the opportunities available, and making buy-sell decisions
confidently. It is assumed that the goal of every reader of this book is to be
able to understand any market. To do this, one must understand the needs and
goals which motiv ate the many market participants and determine their
timeframe perspective. Knowing an individual 's (or a group's) timeframe
perspective is key to market understa nding because market change - price
change through range extension - is caused by the entrance of long timef
rame participants upsetting what was an initial balance. The long timef
rame participant enters a market which was previously balanced because he
perceives price away from value: a market-created opportunity. It is only
through knowing this that a market participant can position himself against
the other participa nts in a risk-f ree manner. However, so long as one
is able to observe participation in the marketplace - and understand under
what condi tions such participa tion occurs - it is not necess ary to be aware
of the " enunciated " views of the many market participants. One need only
monitor their activity in the market, because the views and timefra mes of all
participa nts about that market are expressed in their activity. A
Hypothetical, Very Readable Market The producer produces the product because
the consumer desires it, either to use or to resell. While a centralized
market place does not exist, both parties have an interest in facilitating
trade. They have market-imposed timef rames (each can only conduct
business when face to face with the other) , they have participant timef rames
based on their individual needs and perceptions, and both seek inf
ormation

ILL USTRATIVE EXAMPLES 51 about value. (The producer wishes to sell as

expensively as possible and wishes to know how much the consumer will
pay, while the consumer wishes to purchase as cheaply as possible and
wishes to know how cheaply the producer will sell.) Both producer and
consumer are self-interested and observant, both have an equal opportunity
to read and monitor the other's motivations - but only as expressed through
market participa tion - and both wish to prepare themselves to read the
demands of the other in an antici patory manner. If both adequately apply
themselves to the task of observing the behavior al activity of the other
as it is expressed in market activity, each will be able to anticipa te
the needs of the other and reach a mutually beneficial agreement. Since
both seek to facilitate trade, extensive negotiating takes place. Each
side tries to use excess price to promote trade. For example, the consumer
may be saying, "I suppose I might be able to purchase 50 units at thr
ee," while the producer may be replying, "There's no way I could produce 50
units for less than eight. " Time regulates this negotiating activity,
and relatively little time is spent discussing price excesses, but, much
time is spent haggling once the two get to discussing the price area each
consider s near fair value. This negotiation, as you can see, is an
example of an active auction, producing a range of time-price oppor
tunities. The producer and consumer decide to enter into a agreement for the
duration of one year. This agreem ent, while not a market place, is
nevertheless trade and therefore can be viewed as a form of market . The
agreement specifies that the consumer will purchase a fixed numbe r of
product units for a set price at regular time unit intervals. Thus, the
consumer agrees to purchase a steady supply of the product while assuring
himself a regular supply of the product at a fixed cost. Meanw hile the
producer agrees to a fixed supply of the product in exchange fo r a
fixed, steady profit. Both accept the price to be paid fo r the product as
fair value. This agreement illust rates the many factors which exist in a
central ized marketp lace. For instance, market activity (spelled out in
the terms of the agreement) is triggered by market-imposed timeframes
(such as the time it takes the producer to produce) and participa nt
timef rames (such as the time units which would best fulfill the consu
mer's perceived need). A normal market 's volatility depends upon the mix
of long- and short-term market and individual time frames. But, since the
timef rames are fixed by the regularity of the time units, and the price is
fixed for the duration of the year, both parties are operating in the same
timef rames, and hence no volatilit y exists. Thus this "mar ket" has
demonstrated the ability to control and regulate itself through its
allocation of price and time, yielding an

52 MARKET S AND MARKET LOGIC agreement which produces balance in market

activity. Supply and demand consi derations remain unchanged for the time
being. All goes well, since the market place 's market activity is in
balanc e. In other words, the producer is able to meet the production need
comf ortably while the consumer meets the consumption require ments. On the
contractually agreed upon date, the consumer comes to pick up and pay for his
merchand ise. Each participant can examine and understand market activity by
examining time-price opportunities. But since an agreement is in place for a
year, time-price opport unities are not in flux, but are frozen. In this
instance, there is no readable prefere nce through variant time-price opport
unities which occur at different times, at different or the same prices at
different or the same levels of volume. However, after several exchange dates
have passed and business has been transacted as agreed, the consumer asks
that the agreement be altered so that he can now pick up the same quantity
of mercha ndise sooner, in effect asking the producer to increase the
frequency of production. This would, of course, increase the produ cer's
total production for the remainder of the year, a shortening in the buyer's
timefr ame which will increase market activity. What has transpired? The
consumer has shortened his (participant) timef rame, hoping to increase market
activity. His reason : he has two timefr ames, out to the end of the year and
another over the short term. It is obvious that he has an economic
advantage in requesting an increased delivery schedule. This act shows a
shift in the supply demand situation; the consumer is increasing his
frequency of reorder, since he is gaining an advantage in doing so. Market
activity is no longer in balance and hence, an opportunity for price
change is evident. It becomes evident by studying the information provided
by market activity as illustrated in time-price opport unities. The
producer is able to recognize that (since the consumer is shorten ing his
timeframe) value is shifting, and he can assume that demand has increased,
the best possible outcome for the consumer, and the worst for the producer
- if price is held stagna nt. The length of time during which business
was transacted at the agreed-upon price was reasonable enough - at least
three transaction periods - thus also resulting in a large amount of
transactional volume, thereby displa ying that the market facilitated trade,
indicating market accepta nce or value. Had the transactions occurred over a
small amount of time, it would have resulted in only a small amount of
volume and thus in hinds ight might indica te market rejection or unfair
value for one side. Thus, since all prices have the distinction of being
either accepted as fair value or rejected as unfai r value, and the produc
er's price has clearly been accepted, he should test the market by raising
his price. Assuming

ILLUSTRATIVE EXAMPLES 53 he can speed up the production process to

satisfy the consu mer's request, the producer realizes that he is in a good
position to raise his prices because the demand exists. The producer
realizes that either the consume r's personal appetite for the produc t has
increased or he has developed or is expanding his marketing of the product
to others beside himself. This would demonstr ate the market displaying a
price extension beyond the agreed-upon level. It is important to note that
this price range extension (or simply range extension) was caused by a shift
in the timef rame makeup of the market. The consumer shortened his timefr
ame, disrupting the previously balanced situati on. This illus trates that
while both had initially fixed timef rames, the consu mer's timeframe change
disrupts the balance. This unbalanced situation allows the producer to
raise (extend) his price so that the the situation can be balanced. Another
example: if the consumer requested a drop in the frequency of the product,
the producer would realize his need to cut production costs because the
consumer was in a position to ask for a price reduction to stimulate
more demand. Both of these scenarios are looked at in tenns of
incremental change over fixed timef rames. Any change indica tes a change
in the timef rame of the individuals, causing a change in the timef rame
makeup of the market, causing range extension. The consumer, in requesting
an increase in the frequency of produc tion, knew he was purchasing the
product either at value or below value. If the consumer knew he was
purchasing the product below value, was greedy and at the same time insightful,
his strategy might be not to request an increase in the frequency of reorder,
but rather to raise prices to his market without infonning the producer,
thereby withholding infonnation from the market (where producer and con
sumer meet). Since the producer would not have to speed up or delay
production, the consumer would have infonnation the producer would not. (The
consumer would be privy to infonnat ion outside the market place and by not
increasing his reorder frequency, would withhold market-generated infonn
ation from the producer. ) The consumer could then wait until the origina l
agreement expires. He knows something that the producer doesn 't - that he
could sell more than his agreed -upon allotment. He therefore should be
able to negotiate a more advantageous contract with the producer - reque
sting a greater quantity of production delivered quicker, but only on the
condition that the producer lower his price. The producer would have to look
for signs outside the agreement (this artificial market place) if he were to
protect himself. Such a sign might include new producer s coming in, new
producers not coming in, substitute products, etc. But in this artificial
market environment, such a sign does not exist.

54 MARKETS AND MARKET LOGIC This example clearly illustrates that there is
a vital information flow which comes from studying transactional data -
the behavior of a marketp lace. The consumer in this example absolutely
knows the temporary information that he can sell more of the product,
informa tion the producer does not have. The producer must look for informa
tion outside the marketp lace and apply it to the marketp lace - a further
step. He may or may not come to the conclusion which the consumer has come
to. This clearly illustrates that there are two types of information
pertinent to a market place. The first type of information is derived from
outside the market. The vast majority of investors and traders rely on
interpretation of this type of economic data. The second is derived from the
marketp lace activity itself. Few investors and traders rely on it, but
the majority of consumers do. The first type of information can be known by
every one. The second is known only by those who have access to trans
actional data. This example also introduces the fact that whenever there
is an unmatched timefram e change among a group in a market place, that
change will cause a change in price.

8 SOME NON -HYPOTHETIC AL, VERY READ ABLE MARKETS T he following examples
will take a very brief and simplistic approach to several everyday markets
with the goal of conveying an understanding of three key principles of market
logic, as they actually occur in these everyda y situations and as they are
realized by the consumer . The first is the equation, price + time =
value, and its implications. The second is that all markets use price
excesses or purpose prices to stimulate trade. The third is that the entrance
of long timeframe participa nts extends the range, offering an increased
range of opportunities to the marketplace and causing a more perma nent
change in value. (For simplicity 's sake, the following will not ponder
details outside this parameter.) It is these three principles which are the
key to an understa nding of price behavior, and hence to trader linvestor
decision making. The following examples should illustrate how these three
principles are universally grasped and understood by inform ed consumers
making decisions in everyday market situations. In the following chapter,
these same three principles will illustrate a market underst anding in
the organized market places, thereby bridging the gap between consumer
perceptions in everyday markets, and investor-trader perceptions in
organized, exchange markets. A Consumer Shopping for a Condominium The
situation of a consumer interested in purchasing a condominium in a large
metropolita n city illustrates that price + time = value, and also some
corollary implications. It is assumed that this consumer has

56 MARKETS AND MARKE T LOG IC the goal of making an informed decision

(wishing to get the most for his money), and he has no immediate time
constraints. In choosing which condominium to purchase, our consumer acts
as most con sumers do, unconsciously monitoring and assimila ting market
generated information. Likewise, the real estate developer - the other side of
the consumer producer equation - has the task of pricing and successf ully
marketing his condo units. To do this, he also must monitor his market and
extract the marke t-generated inform ation. In other words, both consumer
and developer - whether they realize it or not - are essentially trading in
a market. As market participants, their unconscious knowledge of markets
will hold them in good stead, since the real estate market functions like
any other. In other words, both have the ability to discrimina te among
price at, above, and below value, and both unconsciously associa te a
high time-price relationship (significant volume of transactions at a fixed
price or price area) with value. Consider the following sets of
circumstances. 1. The developer has set a price per square foot, and having
meas ured and allowed for fixtur es, he has priced the various size condo units
in his building. But after an intensive six-month marketing campaign, he
has sold only 10% of the units. The housing consumer, as an interested
buyer, has observed the relatively small amount of transactional activity
over this period of time, and after viewing the complex with sales
personnel, should realize that this price has been rejected by the real estate
marketplace as too high. If he is interested in buying into this complex, he
should assume he'l1 be able to succes sfully bid significa ntly lower than
the developer's asking price. In the event that he does not bid, or should
his bid not be accepted, the consumer can assume that he'll be able to come
back at a later date, and offer the same price. He can assume that ceteris
paribus (static interest rates, static housing demand, etc.), he'll not
lose out on this buying opportunity. In other words, he has not seen enough
trans actional volume at the develope r's asking price, and since he uncon
sciously knows that price + time = value, he knows that this oppor tunity
is an "overpr iced" one, an opportunity to buy above value , and that the
developer will probably be forced to lower his price if market conditions do
not change, or else he will not sell many units. Thus, at this price in a
static situation, the consumer knows that this specific opportunity will be
available and that time is on his side. He does not have to initia te a
purchase now at the develope r's price. He knows he will have time to
respond to this oppor tunity, and might consider respon ding to a lower
price.

ILL USTR ATIVE EXAMPLES 57 2. Consider the housing consumer 's situation
regarding another similar property within the immediate vicinity. This
property has had the same six-month intensive marketing campaign, after
which the developer has sold 80% of his units. Our housing consumer has
observed a tra nsaction volume level that indicates value in the eyes of
the real estate marketp lace. In other words, compared to the first example,
this condominium property has been accepted by the marke tplace as fair
value. If he is interested in a unit in this complex, he can safely assume two
things. First, he knows that he'll probably have to pay very close to the
asking price - if not the actual asking price - in order to buy one of the
few remaining units. Secondly, he knows that if negotiations fail, the
opportunity to buy a condominium unit in this property will probably be
short-lived. If he doesn 't wish to purchase today or at today 's offered
price, he cannot expect that units will be available much later. The
marketplace has valued this opportunity as a fair value, and time is
not on the side of the person who waits in that instanc e. He must
initiate a purchase if he wishes to own one of these units at the current
price area. 3. As an aside to these two examples, consider another situati
on: one where the marketplace is assessing the property as below value, but
price is not being readjusted upwards to balance the situation. How would
the developer know he faced such a situation, and how would he handle it? In
areas where there is either a shortage of housing, or quickly changing
market developments (such as lower interest rates, plans for new factories
in the area, etc.), which increase demand and hence values, those
developer s who do not monitor market-generated infor mation can not maximize
the value of their product. Meanw hile, consumers who unconsciously monitor
market-generated information often profit by initiating purchases, buying at
what they know will soon be below value due to the changes in the
supply-demand situation. They are in effect taking advantage of the
developers' lack of informa tion. While always pricing their product at what
they consider to be fair value in the short timef rame, producers who do
not consciously monitor market-generate d information neverthe less cannot
establish the market 's perception of value. They often find that their
perception of fair value differs vastly from that of the market. In the
inflationary cycles from 1950 to 1980, this often meant that developers were
selling housing faster then they had expected, but still below value in the
longer timef rame. Consider the way some developers handle the situation
when the marke tplace is assessing the property as below value, but the
developer is unwilling or unable to readjust price upwards to balance
the situation. Either units can be sold on a " first come, first served "
basis,

58 MARKETS AND MARKET LOGIC or a lottery can be held. In either case,

since price + time = value, and price was offered for such a short
period of time, the consumer can safely assume that the market is not at a
fair price. Thus, one can expect initial resales to be at prices
substantially higher than the artificially low lottery prices. Furthermore ,
if a lottery is the means of balancing supply and demand (rather than price
and time), the consumer can assume that a high percentage of the lottery
purchasers will be people who do not intend to move into the complex. Rather,
they are long or short time frame traders or investors, participants who
take advantage of the lack of informa tion on the part of the seller and are
willing to allow time to work in their favor in order to make profits.
Consumer Awareness of Restaurants Another familiar example of a market which
illustrates the implications of price + time = value is a restaurant. A
price offered over time which is not confir med by acceptance of the oppor
tunity does not equal value but displa ys market rejection. This type of
activity in the market for preparing and serving food is illustrated by those
restaurants which are consi stently underpatron ized. The lack of customers
signals that the market doesn 't accept the combination of location, service
and food at the offered price as at or below competitive value. Thus,
customers do not respond to the opportunity in quantity enough to keep the
restaurant in business. While underpatr onizing signals market re jection
(price above value), certain type of activity signals market acceptance
(price and value equal), and another type signals what can be read as
market ultra-accepta nce, or price below value. Restaurants which take re
servati ons, elimi nating the need for and existence of a line of patrons
waiting to be seated, are probably offering what the marketp lace
measures as fair value. This can be assumed because of the reason a
restaurant takes reserva tions: to have a chance at evening out the flow of
customers through the dining period rather than discouraging customers. It
is not common for restaurants to take reservations during those times when
traffic will be high and demand will exceed supply. A long line of patrons
who are waiting for the oppor tunity to be served is a strong indica tion
that the restaurant is offering a culinary opportunity which at the present is
consid ered to be below value. Thus, the restaurant with long lines of
patrons has the opportunity to either expand capacity or raise prices, or
both. The Market 's Important but Temporary Operational Procedure The
assumptions which could be drawn by potential consum ers of the condominium
and restaurant examples were due to their monitoring a

ILL USTRATIVE EXAMPLES 59 variable (price) against a constant (time) in a

particular market and noting where transactional volume indica ted market
acceptance. This is the most obvious implica tion of the equation price +
time = value. The second key understanding is the most important of every
market 's operational procedure: that price excesses or so-called purpose
prices are used to stimulate or facilitate trade. No market is static for
very long. Prices are always changing, continually seeking to promote
activity from other timef rame partici pants by offering opport unity. The
market uses what can be termed operational procedures to facilitate more
trade, using time as the controlling factor. Most consumers are aware of
the operational procedures of the marketplace which cause temporary changes
in price (excesses) to occur. They occur in order to facilitate trade due to
the seasonal or cyclical shifts in the market 's supply-demand situation.
Using time as the controlling factors means that these excesses are
offered for only a brief time and are by their very nature short-lived; if
these oppor tunities were offered to the consumer over an extended time, they
would become the new value area. Happy hour, below market financing on
new cars, the previously mentioned spring clear ance and the high price
charged in season at a seasonal resort, all are price excesses; their
respective market 's operational procedure s exist because they facilitate
trade. Numerous examples or more in-depth analysis are not needed. It is
impor tant to note that an excess price is a temporary change which does not
effect a major change in value or the basic structure of the market place,
but offers an attractive, low-risk opportunity.

9 THE MARKET'S MOST IMPORT ANT CHARA CTERISTIC W e move now to the most
important part of a market 's change, that development which causes a more
permanent change in value. It is the entrance of a long timef rame participa
nt who, in sensing a market-created opportunity, upsets the currently balanced
situation. The entranc e of a long timef rame participant signals a
fundamental structural change in a market and its effects are lasting, not
temporary. When ever a marketp lace witnesses this phenomenon, there will be an
extension of the range or pricing structure . Future value will be
determ ined through the acceptance or nonacceptance of this new extension
of price. It is this type of situation which is both the most beneficial
and most hazar dous to the investor-trader. This is because the entrance of a
long timeframe participant has a lasting impact. It is an event which is of
obvious importance in everyday markets. Having this informat ion has enhanced
the consumer' s ability. It will be the single event which will be highli
ghted in four marke ts: the auto and discount airline markets and two excha
nge-traded markets. The ability to extract this same information from
organized excha nge market data will have the same results as the ability to
identif y it in everyday markets. In all markets, identifying the entrance of
a long timeframe participant yields a tremendous amount of market
information. Being able to isolate and monitor this factor is key to
reading range development and market continuation.

ILL USTRATIVE EXAMPLES 61 The U.S. Auto Market The U.S. auto market of
the 1950s and 1960s was domina ted by Detroit's big four auto manuf
acturers and from a market stand point, represented a static or balanced
market situation. This market was balanced because it satisfied all the
short time frame participan ts' needs in a manner which satisfied all the
participa nt needs. (The manufac turers prospered and the consumer was able
to purchase at fair value. ) However, this relatively noncompetitive situation
of four companies, all building similar sized cars, while balanced in the
short timef rame neve rtheless represente d a market-created opportunity for
longer time fram e participa nts interested in manufacturing automobi les. In
other words, Japanese manufactur ers, notoriously long timef rame market
participants, consi dered the U.S. automo bile market as an attractive
opportunity and decided to enter and compete in it. They did so, offering a
higher level of quality, substantially smaller size and a lower cost
product. Prices for cars offered in this quasi passive auction market did
indeed move lower overall because of the new, cheaper Japanese models. In
essence the availabilit y of the lower priced Japanese cars expanded the range
of purchasing opportu nities on the lower end for U. S. consumers. Thus,
the automobile market changed due to price range extension caused by the
entrance of a long timeframe participant which upset the established
balance. Secondly, the U.S. consumers did indeed buy the Japanese product at
these lower prices. Detroit's product became perceived as overpri ced and of
poor qualit y. Thus, since subsequent transactional volume was significant
enough to establish a new value within this structure over time, the value
area for all cars shifted down. The new value put the old big four at a
competitive disadvantage. U.S. consumers were able to discriminate between
price at, above and below value and to act on a well-thought-out plan based on
their perceptions of quality versus price. This change in value in the U.S.
automobile market spelled a different opportunity for consumers. This possib
ly influenced longer timef rame participants on the consumer side of the
producer-consumer equation - those who bought a second car because of the low
cost and fuel efficiency. Had the new products at lower prices been
unattractive to U. S. consumers, the expanded range would have been
rejected. Yet consumers responded to the expanded range , and the market
shifted. The transactional data are yielding information about the market 's
current appraisal of value, not only to the consumer who then was not as
interested in Detroit's product, but to the executive in Detroit. The U. S.
manufac turers, the former short timef rame producers, were forced to
respond in a nonstatic way - they built smaller, more fuel-ef ficient
cars, offered 50,OOO-mile warran ties, and increased

62 MARKETS AND MARKET LOGIC the qualit y of their autom obiles. The
Agricultural Marketplace The evolution of the U.S. farm market from the
decade of the 1970s through the mid- 1980s, consid ered from a macro point
of view, is another example of a market-cr eated opportunity encouraging
long timeframe particip ants to enter the market, thereby upsetting a
bal anced situation, and ultima tely causing range extension downward. The
international agricultural market in the 1960s and up to the 1970s was
domina ted primarily by the American farmer. His vast international
marketshare represented essentially a static or balanced market situation.
This relatively noncompetitive situation unfolded throughout the 1970s.
Increased demand meant high prices for agri cultural commodities, high
profit per acre and a relatively high level of prosper ity. Farm equipment
manufacturers responded by producing bigger and more costly machi nery, and
lending instit utions in tum extended credit based on the increased value
of farmland. But this market-created opportunity caused the entrance of
long timef rame participants. Longer timef rame participants not involved in
the agricultural markets saw the balanced situation as an opportunity. The
result during the late 1970s and into the 1980 s was an increase in the
amount of acreage brought into agricultural production, improved and rapid
development and usage of seed hybr ids, improved tech nology and research,
all of which combined to produce more crops, thus buffering the initial
price direction of agricultural produc ts. In addition, agricultural
production in all third world countries was improv ed, particula r ly in
Argentina and Brazil. Many governments at this time sought agricult ural
self-sufficiency and provided incentives to encourage such policy. Not only
did this cut the potential U.S. export market, but it created several net
exporters competing directly with the U.S. farmer, who now, while
increasingly productive, faced a shrink ing market place in which to sell.
Thus, the long timef rame participants saw the market-created op portunity
and entered the market, inevitably causing range extension to the low end.
In other words, price away from value over the long time frame attracted
the entry into the marketplace of long time frame participants, which then
changed the condition of the marketplace. A Grocery Marketplace Consider how
a comer grocery store's market for customers is affected by the entrance of
a long timef rame participa nt, another grocery distributor. The grocery
stor e's market structure is that of a passive auction. The

ILL USTRATIVE EXAMPLES 63 grocer provid es a range of prices fo r

differing quality of similar products, and for product substitutes from
which the consumer can choose. Within this struc ture, the time-price
opport unities accepted and rejected reveal to both consumer and producer-
di stributor exten sive market-generated infor mation as to how the market is
perform ing. The consumer wants to purchase at a fair price and will do so
on a continuing basis at a price where he has purchased in the past.
Likewise, the owner will restock inventory based on the consu mer's usage
of products within this structure. In a situation where the grocer is in
a monopoly situation, most business is transacted at fair prices for the
day timef rame. In other words, both consumer and producer feel price
fulfills their need, but the grocer feels no need to offer excess prices
in order to facilitate an increased amount of trade. His location and
lack of competition encourage him to operate as a short timeframe
participant. It is only when the situation changes that this pattern
might be disrupted. How this situation can change and how the consumer would
handle a change is illust rated by the results of the opening of a
nearby superm arket chain. In other words, this balanced market situation
can change because of a change in the customer and grocer timef rame
makeup, a change which would be caused by the entrance of longer
timeframe particip ants who view the current balanced market structure as a
market-created opportunity . Consider how a new, competing store would
change things: a new store would be built only if the longer timef rame
grocers feel they can respond to a market-created opportunity. Since they
are currently outside the market place and would sustain building costs to
enter it, they view it not from the day timef rame, but from a longer
timefr ame. If a supermarket branch sets up near the comer grocer, the
new competition is going to influence the range ofthe first grocer's passive
auction, causing a more complex situation than the formerly static one,
and offering opport unity to the customer who is aware . All consumer s who
see the announcements and advertisements and notice the physical building
going up (information outside the market) know that they will be able to
take advantage of the competition. The comer store owner, too, realizes
that he 'll have to change his approach to the market place. This is because
the new store is going to offer purpose pricing to get customers into the
store, causing many of them to lengthen their timef rame. In other
words, because of the entrance of the longer timef rame participant, each
store will be forced to offer purpose pricing in order to compete fo r
the consumers. Once the second store is opened for business, this new timef
rame change will be expressed in prices charged, market-generated informa
tion. The consumer will read the change in market-generated informa tion and
respond to it. Beca use he is now offered price away from value

64 MARKETS AND MARKET LOGIC by the two competitors, he has become a longer
timef rame participa nt, responding only to market-created opportunities
offered in the name of purpose pricing. As the majority of shoppers become
longer timef rame parti cipants, if no new customers are attracted, the
grocer with the shorter timef rame of the two competitors -- usually the
smaller, less capital ized comer store - suffers an erosion of profits and
may go out of business. If the pool of consumers grow s, however, both
stores can flourish. The Airline Market The airline industry is another
everyday example of a market place - a marketplace not for a product but
for a service - which has been profoundly affected by the influx of long
timef rame participants. The purpose of the airline market is to facilita te
the greatest amount of trade by flying air travelers in filled airplanes.
As with every market place, the cost of the airline indu stry's service -
trans portation - is very elasti c. Labor, inter est, energy and airplane
costs are the key variab les. Despite the airlines' marketing attempts,
consumers tradi tionally do not maintain a great feeling of brand loyalty
toward airlines. Indee d, air transportation is almost a " commodit y. "
Other. than the futures, stock and option markets, an airline market is
probably the most complex and difficult to read market that ordina ry
consumers (and the airline 's pricing executives) are involved in. An
airline single market would be defined as the aggregate of various fares
available at different times from the various carriers for transportation
from a location to a single destination. In other words, the fares charged
by each of the various airlines to the same destination collectively compose a
passive auction marketplace which continually offers a range of prices.
Travelers choose among the range of prices and decide whether to buy or
not. The excess price charged fo r a one-way ticket is the variable each
airline 's marketing department uses to promote activity. Every airline
market -like every other market is composed of participa nts with various
timef rames who choose to act or not on marke t-imposed timef rames, thereby
influencing the mar ket's behav ior. Market -imposed timef rames are the take-
of f times for each flight and participant timef rames are the needs of the
individuals needing or wanting to travel. A static or balanced situation
existed in the U.S. airline markets when the landing route structure and
the frequency with which each airline flew was detennined by governmental
agency. The airlines and union members prospered while the consumer was
able to purchase at fa ir value. However, this relatively noncompetitive
market situation changed drastically with governmental deregu lation of the
industry effectively lowering barriers to entry. When this was done, the
industry

ILLUSTRATIVE EXAMPLES 65 represented a market-created opportunity for long

timef rame partici pants, encouraging them to enter. In other words, long
timef rame market participants cons idered the market - with its high
pricing structure - as an attrac tive oppportunity and decided to enter
and compete in it, offering a lower cost service. It is impor tant to
remember that the need of any business competitor is to stay in business
and his goal is to gain in profitability and/or marketshare. A new
competit or's first move is toward establishing marketshare . This can be
done in only one of two ways: either by attracting new users to the
market via his airline or by attrac ting the users already in the market,
who are using another airline . This is true in the airline business as in
any other. While every new competito r's long-term goal is to gain market
share , to do so the company must over the short term seek merely to
facilitate trade, in this case by promoting ridership on its airline in
order to introduce its service to customers. To do that, the comp any must
resort to purpose pricing, the mark et's temporary opera tional procedure
for facilitating trade. In this case, the new airline offered excessively
low fares - prices at which the airline would not be able to make
profits. With the onset of deregulation, many new "no-f rills" airlines
entered the field, and success fully competed against higher cost
competitors by offering such excessively low fares. 4 Travelers accepted
the "no-f rills" appro ach and the new airlines flew filled while the
others lost customers and flew partially empty. E ach higher cost competitor
soon read this market-generated information and understood the challenge -
retain or expand marketshare by offering a lower cost service or go out
of business because the market is rejectin g the higher price as above the
value offered by the "no-f rills" competition. In other words, as competition
increased and the domi nant concern among the short tim eframe airline
management became deregulation, each compa ny instituted a plan to handle
the opportunity/ crisis by cutting costs, thereby forcing each to become
more long timeframe in perspective. Thus, the entrance of the long timef
rame discount airlines and the resulting extension of time frame among the
formerly short timef rame sellers caused the airline market to experi ence
a trem endous range extension to the downside. Fares plummeted. The short
time frame participant airline traveler is the business flyer who has to
travel on short notice and must consequently pay a fair fare. In other words,
the business traveler often does not have the lUXUry of traveling only
when special low rates are offered. The long timef rame flyer is one who
may or may not fly (i.e. , on standby) but by making a reservation several
weeks or months ahead is rewarded with a market-created oppor tunity when
he responds to the new, lower price. The long timef ramers would be the
students, vaca tioners and others

66 MARKETS AND MARKET LOGIC who can choose to fly at any time and tend
to plan and shop ahead and/or book "standby. " Both of these buyer
groups extend their timef rame as a long timeframe selle r's entrance
upsets the previously balanced market and fares plunge. This is because
the ensuing fare war is offering many attrac tive situations, situations
where price is below value for those who book their flig hts ahead. Thus,
when a long timef rame influence upsets the balance of a static situation,
consumer s benefit by becoming long timeframe participants where possible,
further upsetting the market. Beca use of deregulation, long timef rame
airlines (sellers) saw an opportunity and entered the market, and in
doing so became short timef rame sellers. This introduction of long-term
competition will always change the balance of either the passive or active
auction structure. The changed market situation in tum influenced further
timef rame participa nts on the other side of the producer -consumer
equation to extend their timef rame. The entrance of the long timef rame
particip ant and its effect in stimulating interest in becoming a long
timef rame buyer has impa cted the market signifi cantly. The elasticity
which was inherent in the airline indus try's operations has been reflected
in its pricing structure: when the price charged for a particular route
moves up, demand for transportation decreases and planes fly with a
larger percentage of empty seats. When airlines charge less and price
moves down, demand increases, and planes fly with full seats. New competitors
increasingly entered the marketp lace, employing a " no-frills" approach to
service. The airline market is another which demonstrates that any sub
stantial change in value over time comes from a long timef rame trader
responding to a market-cr eated opportunity. This change will not be
temporary in nature. Conclusion The inherent awareness and market
understanding that each of us as consumers brings to all markets have
been awakened. Hopef ully, the reader can understand why by studying market-
generated information. In any and all markets, he can: 1. understand that
price + time = value in the present and that he can theref ore di scrimina te
between price at, above and below value and act based on a well-thought-out
plan based on personal needs. This leads to the basic understanding of how
values change, and how significa nt these changes are to price direction in
both the immedi ate and longer term.

ILL UST RATI VE EXAMPLES 67 2. realize that like the world, no market is
stable, and thus changes in value will inevitably occur. These changes can
be temporary or more permanent in nature. Temporary procedures used in the
everyday market place have price away from value in order to fulfill the
market 's purpo se, which is to facilitate trade. 3. trace significant,
more permanent changes in value to the entranc e of the longer timeframe
participa nt responding to a market-cr eated opportunity or a disaster as it
relates to his personal needs. 4. understand why the ensuing competition
must change the direction of either the passive or active auction structure
of the market, which influences participants on the other side of the time
fram e. Every participant involved in a market place should seek to be
aware of the structural changes brought about by the entrance of the other
timef rame trader because they will be permanent, and mistakenly thinking
that a market will come back will be costly. Before moving on to the
next chapter, the reader should be well versed in a working knowledge of
the principles outlined in Chapter 2. When this is accomplished, consider
one or several everyday markets with which you are familiar and thinking
for your self, apply the principles to its interwor kings. It is impor
tant to actively expend energy accomplishing this; doing so involves
cultivating the less developed type of knowledge (as intro duced in the
first chapter). In contrast, reading this book only cultivates the second,
but provides a framework for the first. In the next chapter, the awaren ess
and understanding of markets will be applied to an organized futures
market. While the details of procedures and conditions in the futures
markets will be discussed to a greater extent, it will be the market-
generated information formula ted for visual presentation into a bell
curve which will be the key to understanding. That is, market information
formulated in this manner denotes acceptance (value) or rejection, temporary
changes in the nature of price and value, and most important, the
entrance of the participant who can cause more permanent change in the
structure of the market place. By overlaying this basic understand ing, one
will have a beginning structure from which to gain a more detailed and
com prehensive understanding. This will provide necessa ry information,
information required by those who operate in everyday situations as
consumers. With this knowledge, one can develop the self-confidence in
decision making akin to that of consumers in everyday situations.

68 MARKETS AND MARKET LOGIC 4 In order to have an informed expectation

as to how long the company will be able to price services below cost,
one needs to ascertain the company 's timefra me. In other words, how long
will the new concern be able to sustain the purpose pricing mode before
running out of money? How much capital does the comp any have available to
garner a presence in this market, and how likely are they to discontinue
competing in the more compe titive routes if they do not meet with success
in terms of a high ridership over a short timef rame while in a purpose
pricing mode? This time frame question is impor tant because while price
promot es activity through excess, time regulates this activi ty. Thus,
the airline that is not as well financed operates from a shorter time
frame. And in any mark et situation, everyt hing else being equal, the long
timef rame participant has the stronger position, since time is the long
timef rame participant's ally and the short time frame participant's enemy.

10 A GLANCE AT FUTURES MARKETS W hat do discussions of the interests of new

companies seeking market share and of consumers seeking bargains have to
do with investing or trading in the organized financial markets? As said
before , all markets are motivated by the same principles, namely those
enumerated early in this book. Futures markets are no different from non-
exchange or " unor ganized" markets, contrary to the belief of the academic
community. In other words, price and value in the organized or so-called
efficient markets are two completely separate variables. What it costs at
this moment is price, what it's worth to each individua l is its value.
Thus, a price for a futures contract, like a price for a stock, a
piece of real estate, a used car, groceri es, etc., can be under- and/or
overvalued. No futures market is ever at value for an extended period. Price
and value diverge in futures as in other markets because of the nature of
marke ts. All this means that individuals can indeed distinguish between
prices and value in the futures market, gaining information in the process.
Focusing on market activity, rather than price, prov ides a structure that
organizes each day's activity. The market can then be viewed objectively,
as either a market in balance or one which is out of balance. Once an
individual realizes this, virtually all questions about how to trade or
invest succes sfully can be answered by relating the question to an unorgan
ized, everyday market situation. This chapter is a discussion of fu tures
markets as an example of an organized market, not an all-inclusive
explanation of how they func tion. It will be divided into two parts. The
first part will relate how the

70 MARKETS AND MARKET LOGIC principles introduced in Chapte r 2 apply to

the futures markets - as well as all other organized markets - illustrating
how futures markets are no different from any other market. The second
part will use 10 days of market activity to demonstrate how any
participant can study and learn to read the market, discove ring how the
entran ce of the other timeframe participa nt affects the market , where value
is being accepted and where price is being rejected, and whether the value
behavior is continuing its movement. A Glance at How the Futures Markets
Function Futu res markets mirror other active action markets in almost every
respect. As auction markets, each futures exchange has a location, the most
prominent of which in the U.S. are in Chicago, New York, and Kansas City.
Participants involved in futures trading are either present in person or
represented by others. Those who are present can observe transactional
information, while those represented by others previously could not. As
with every other market place, the purpose of every futures market is to
facilitate trade. In other words, the market will always go to a price area
that will allow the most trading activity to take place. When a price
area is not facilitating trade, transactional volume eventu ally dries up,
and that time-price opportunity area is eventually rejected. Thus, if price
moves to an area which is reoccurring over time, and generates signific
ant transactional volume, that price or price area is fulfilling the market
's sole purpo se: to facilitate trade. This makes logical sense if it is
thought through. In order for the market to facilitate trade, participa nts
have to volunteer to use it. But few partici pants are going to voluntee r
to make a trade that they fe el is unfair. If it is unfairly above value,
it will be sold because fewer buyers consider the price fair and hence,
most buyers will refrain from their buying activity. If it is unfairly
below value, it will be bought as the sellers use the same rationale.
Theref ore, if participa nts are accepting the price and theref ore trading
at it, the area of price activity represents value for futures traders in
that timef rame. The principle that every fu tures market always seeks
activity is illustrated almost daily at different times in every futures
market. An example might have the market down two or three cents on the
day and the trading pit will be empty . At this point - when the market
's transactional volume dries up and traders leave the pit - savvy locals
will get out of their short positions. One of the sayings savvy traders
rely on is, "Never sell a dull one. " This means that the market parti
cipant should not go in the same direction as the market has gone in order for
it to get dull, or when the pit empties out. When the pit fills back up,
the market will almost alwa ys move in

ILLUSTRATIVE EXAMPLES 71 the opposite direction to which it has gone to

create the inactivity. The pit fills back up because the higher prices
attract people out of the coffee shop s, etc., and into the pit and into the
market. Thus, when no one wants to buy a market, it will rally because
lower prices aren't creating any market activity. When the market comes
back up, people react to the higher price, thereby generating further
activity. This is an observation few people - even those exposed to the
futures markets on a daily basis - have consciously articulated. It is
an invaluable observ ation, explaining why price extremes are character
istically made on low volume. When this inactivity occurs, the individual
who understands market logic realizes that chances are the market has done
its job in finding that it had gone too far for that day, and he can use
that excess as a benchmark from which to trade the long side. Market
activity in the futures markets is composed of the interaction of time and
price, a time-price opportunity. Thus, the best way of studying market
activity is studying the range of these price units over constant time
periods. Each time-price opprtunity unit provides the possibili ty for one
or more participants to voluntarily act as either buyer or seller. Thus,
time- price opportunities are flexible measure ments which portray market
activity in a free market. Market activity in the futures mark ets, as
in every market, is generated by voluntary participa nt use and is
triggered by market imposed and participa nt time frames. Several market-
imposed time frames in the bond market might be the next Fed intervention
hour, today 's close, or the next release of money supply figur es, this week
's close, and the next treasury auction. Indeed, all options and futures
contracts, by definition, have a marke t-imposed timef rame known as
expiration. The futures market and its particip ants have varied timefra
mes which fo rce participants to make buy-sell decisions. In previous
exam ples, markets have been examined by analyzing the beha vior of the
participants. This can be done by studying and understanding the needs and
goals of each of the participants, from which one could gauge that
participant 's time horizon. On the surfac e, this approach would not seem
to be applica ble to examining marketplaces with many varied participants.
But participants can be colle ctively grouped by the length of their concerns
and their timeframe or time horizon. Thus, the market is made up of
self-interested individuals and therefore is motivated by the collective
dominant, and latent timef rame concerns. Different participants in the
futures market have different time fram es during which to make their buy-
sell decisions. Those partici pants with longer timefram e perspectives have
time to manage their inventory and actions. Trading from a long timef
rame gives the participant time to act. The longer one's timefram e, the
longer one has to make all buy-sell decisions.

72 MARKETS AND MARKET LOGIC In an earlier chapter, the percentage mix of

short time frame versus long timef rame part icipa nts in an "at value" or
"fairtrade" price area was contrasted with the percentage mix of short
versus long tim eframe participants in a "below value" price area. The
passage mentioned why the short timeframe participa nts dominated activity
during the " at value " situation , but noted that long timeframe parti
cipants entered the market in quantity and competed when the product was
offered at a price the market consi dered "below value. " Furth ermore, it
was pointed out that the grocery store would sell more product for the
duration of the "below value" offeri ng, but would only offer the product
at a special savings for a limited time. This is typical activity in a
two-timef rame market. In the process of facilita ting trade in the short
run, the futures markets create opportunities for particip ants operating
from a longer timef rame. Long timef rame participation is evident at an
extreme (buyers on bottom , sellers on top) when the market experiences a
brief time-price relationship due to the extreme. This is caused by the
increased competition among the short and long timef rame traders for the
same opportun ity. This illustr ates how price promotes activity: it does
so by attrac ting participa nts not already involved in the market - those
participa nts with long timeframes. This is evident in all markets. This
realization is significant because when price attracts long time frame
participants, the condition of the futures market is changed. This
demonstrates that certain prices bring in those market participants who are
not active under normal or "at value " market circumstances. When examining
the normal bell curve distribution found in all markets (illustrated in
the futures market examples), one finds that the bulk of trade in the
value area is transacted by short timeframe participants. One also finds
that, as in other markets, long timeframe participants give futures markets
control over their primary function by being active on the extremes. As
well as balancing the timeframes of participants, futures markets are also
continually in the process of balancing the two distinct and competing
interests of the producers of the commodity or product on the one hand, and
those of the consumer s who demonstrate a need fo r the commodity or product
on the other. As in every other marketplace, the futures markets continually
fulfill needs for both sides of the producer-consumer equation. When a
futures market as a service does not fulfill the needs and goals of both
producer and consumer, it ceases to facilitate trade. Outside "customer
paper" is not attracted to the pit, transactional volume dries up, and the
pit is soon empty. Thus, every active futures market balances the needs of
both sides of the producer-consumer equation with four componen ts: a product
or commodity, a need for it, price promoting activity through excess, and
time regulating that excess. Each day during market hours, futures

ILLUSTRATIVE EXAMPLES 73 markets control and regulate themselves through

their alloc ation of price and time, yielding a natural organization which
produces balance in an active phase called market activity. The market 's
natural organ ization means that it is regularly going to have extrem es that
over the short term are too high and too low. This will occur over
every timef rame - hourly, daily, weekly, monthly, etc. Thus, all futures
markets, like all other auction marke ts, must go too high to find out that
they have gone high enough and too low to find out that they have gone low
enough. Market Activity Yields Information In gathering information prior
to taking buying or selling action in the futures market, the majority of
participants focus on information which, strictly speaking, is found outside
the marketplace. This outside informa tion would include news reports,
government data, remarks made by influential offic ials, etc. Few focus on
the fact that market activity, price over time organized by a bell curve,
yields market-generated information. Indeed, fo r an individual with a keen
market understanding - the ability to read market-generated informa tion -
studying information outside the mar ket can become almost extraneous. Furth
ermore, it is very difficult to apply outside information to the market in
order to discover where price is being accepted as value versus where
price is being rejected, whether the value behavior is continuing, and the
overall condition of the market. (Outside inf ormation becomes impo rtant
when it motiva tes market-generated information indica ting long tim efram e
participation in the opposite direction. An example might be the market
breaking on the announcement of a bullish report.) All one needs in order
to locate value in a market is provided by studying the information
provided by that market, regardless of the market. In more precise
language, by studying variant time-price opport unities which occur over
time, at different or the same prices at different or the same levels of
volume, one can read the market 's current preference. Thus, the futures
markets continually provide a range of time-price opportunities during
which any participa nt from any time frame can act as either a buyer
or seller. The area most accepted is the area most often used, which,
theref ore, facilitates trade. An earlier chapter illustrated that market
activity yields information when it discussed how the automobile manufactu
ring company 's marketi ng executive can study tra nsactional information to
learn how he should price his product to maximize profits. Any manufacture r
that sells the entire production will raise the price a certain percent.
If, after the price rise, the compa ny is still selling the entire producti
on, prices should be raised again. The trend will be fo r higher prices,
as long as

74 MARKETS AND MARKET LOGIC the price rise is not steep and the market
continues to absorb the manufact urer's entire prod uction. The rate of
price rise will probably increase until the manufacturer stops selling
more. This approach monitoring sales at various price levels in the form
of time-price opportu nities, and looking for change - demonstrates to the
executive how the market is accepting the company 's product at various price
levels, thereby allowing the executive to either raise or lower prices and
production with the goal of maximizing the company 's profits. This allusion
is meant to illustrate that the only way any market participa nt can know
he is maximizing his goal - selling as many of the product as possi ble for
as much as possible - is by testing market receptivity at various prices. In
other words, when current production is being sold at a given price,
that price should be raised in small increments, slowly testing the
market place. At some point, the product will be priced too high, and then
price should be reduced quickly. It is only when this strategy is
continually employed that a producer can truly maximize profits. Any other
management approach to pricing cannot be said to maximize profits, since
the producer does not know how the product is being received by the market
place. He does not have transactional data, he does not have it organ ized,
and so he does not know how the market values his product. This yields the
already discussed realization : in the process of facilitating trade, the
market always creates excesses. It does so because it has to balance
buyers with sellers using price and time. We now can understand why the
excess is made on comparatively low volume. When price moves away from
an established value area to another price area, one of two things will
occur: the new price will either be accepted as fair value or rejected as
unfair value over time. When price is not moved away from what may be an
excess quickly, the market place demonstrates acceptance. If it is
rejected, the price is to be considered an excess. For example, if
suddenly, due to some variable such as weather, Fed interven tions, or any
other factor which will have a strong short -term influence on the
perception of long-term supply and/or demand, either short timeframe or
both short and and some long timef rame traders will want to do the same
thing - either buy or sell - and a big rush will ensue. Price will move
quickly to neutral ize the concern. The question now becomes: will the new
price area become accepted as value through time, or is it a quick blip --
an overreaction by short timef rame traders that becomes a market-created
opportunity for long timef rame traders - and thus displays market
rejection. If it is the latter, the market has generated a very
significant piece of short-term information about the attitude of the long
timef rame particip ant who accepted the price as an opportunity, causing
the market to bounce back.

ILLUS TRATIVE EXAMPLES 75 Thus the partIcIpant with a market understanding

distinguishes among prices, labeling those which are repre sentative of
value and those judged in excess based on the duration of their time occurre
nces. He also distinguishes among prices based on the degree and percentage
change of this price as opposed to yesterday 's value. Again, the single most
impor tant determina nt to taking profitable opportunities versus
nonprofitable opportun ities is to know where this value area is. It is
impor tant to understand and be able to read the information that market
activity yields because it is when price and value diverge that a defined
market opportunity for profit exists. The greater the diver gence, the
greater the opportunity for profit. Parti cipants can take advantage of
price away from value by selling the market when price is over value in
their timef rame, or buying the market when price is undervalued in their
timef rame. Thus, attaining an understanding and an ability to determine
value and distinguish it from price is necess ary before one can taking
advantage of those opportunities created by the market, those which offer
profits. The market has a bigger range of value when it is facilitating trade,
since more market acceptance means that mor e participa tion is attract ed.
Price is trying to move high enough to reduce activity but is being
accepted. Value areas with these larger ranges usually indica te con
tinuation, since prices have not yet gone high enough to shut off
activity. The type of market activit y can be fu rther classif ied according
to how its current position compares to the previous day's value area. In
other words, today 's ma rket activity becomes more significant when viewed
as it relates to yester day's value. Today 's prices can only hold one of
three positions: above, within or below yester day's value area. Consider the
other timef rame trader's usual behavior. Other time fram e buying activity
can be expected at prices below the previous day's value area. Buying price
below value is a characteristic response of the other timef rame trader;
this activity would be labeled responsive buying. Other timef rame buying
activit y within or above the prev ious day's value area is not
characteristic or even expected and is labeled initia tive buying activity.
Since it is not expected behavior by the other time fram e buyer, this type
of activity provides signific ant information. By the same token, other timef
rame selling activity can be expected at prices above the previous day's
value area, since selling price above value is a characteri stic respon
se of the other timef rame trader and would be labeled responsive
selling. Other timeframe selling activity within or below the previous
day's value area is not characteri stic or even expected and is labeled
initiative selling activity. Again, since it is not expected behavior by
the other timef rame seller, this type of activit y provides signi ficant
information.

76 MARKETS AND MARKET LOGIC Within these parameters, the situation will
not always be clearcut, but market activity in a two-timef rame market at
interim and long-term tops and bottoms should demonstrate first responsive
and then initia tive activity opposite the recent direction. In other words,
when a market has topp ed, first respo nsive selling and then initia ting
selling becomes apparent . With these distinctions in mind, an individual
with a market understanding can see that market activity always begins to
change long before the trend turns or the extreme has been seen. Contrary
to popular belief, futures markets are like all other markets in that
they don't •• change on a dime. " This is because change is caused when the
mix of short timeframe to long timef rame participa nts changes. It is
important to understand how profound this statement is: individuals with
different timef rames impa ct the market differently. In other words, in
the absence of long timef rame participants, the market is dominated by
short timeframe participa nts, those who seek fair value. But when long
timef rame participa nts enter the market, they are competing with the
short timef rame participants for the same time price opportunities and
hence upsetting the existing balance in the market place. The major point
is that a market 's directional change is ca used by a readable occur rence.
Thus, a change in market activity signals to the particip ant with a market
understanding that change, not continuation, is occur ring. Yet most participa
nts focus on price alone and thus do not see market activity showing that
the condition of the market is changing due to the change in the mix of
timeframe participation. Characteristics of The Futures Markets In all of
business, it is necess ary to understand what it is one is working with in
order to understand it and how it works. It is therefore no surpri se
that few understand how to consis tently profit from markets, since how
they work seems myster ious. There is no mystery. All futures markets are
essentially ongoing auctions in an all-encompassing sense. One needs to
know the degree of underlying activity in the auction structure to determine
whether the auction is continuing its direction or ending. If a large
action is proceeding, information is generated constantly by the ensuing
initi ating and respon sive market activity of the other timef rame trader.
Information is also being generated concerning the degree to which the market
is facilitating trade. In simple everyday marke ts, it was demonstrated
that if one can isola te and understand an individual 's timef rame, his
interests could be understood. While an individual 's timef rame horizon is
a spectrum, one can simplif y the situation by classif ying individuals
into two

ILLU STRATIVE EXAMPLES 77 participant groupings: those who have entered or

intend to enter the market during the "day timef rame ;" and those who do
not, and thus are consid ered outside the day timef rame, in the " other
timef rame. " The floor local, especially the so-called "scalper, " is an
example of an organized market participa nt who has a basic and very readable
pattern of operation based on his needs and goals. His basic need, like that
of all businessmen, is to remain in business, and since he must make a
daily livelihood, he is more or less forced to trade every day, and thus
trade in the fair value area for that timef rame, that day. He operates
from the shortest timef rame, and is thus a member of the class of day timef
rame participa nts. Day timeframe participa nts intend to trade within the
range , seeking a fair trade within the structure. Their trade activity
domina tes the value area and serves to provide information solely on the
market 's ability to facilitate trade. It is important to note the day
timeframe trader activity as it relates to facilitating trade, as his
percentage of volume is such that it is a true reflection of the market
fulfilling this role. In other words, the mark et's ability to facilitate
trade comes from the volume created by the day timef rame trader. A
second, longer timeframe partici pant is the posit ion trader, the
participant who does not have to enter the market in the day timef rame, but
may or may not enter. This group of other timeframe traders is comprised
of numerous participa nts with various needs and goals. They collectively
do not need to trade every day, but enter the market seeking to take
advantage of attractive opportu nities, namely price away from value. Thus,
partici pant timef rames - and hence all partic ipants - in the futures
markets can be grouped into two categor ies: day and other timef rames.
There are both buyers and sellers in both categ ories. However, other
timeframe sellers seldom trade with other timeframe buyers at the same
time at the same price, since a defined market created opportunity for a
buyer would be opposite that for a seller and vice versa. (When they do
trade, the volume generated is not signifi cant enough to affect market
activity, and hence is imm aterial.) This yields a volatile combination
whereby other timef rame buyers and sellers are serviced by day time frame
buyers and sellers. Auctions continue in the same direction as long as
activity which is creating the directional impact is still present and
evident. This is the activity of the other timef rame trader. Since his
activ ity or involvement in the market is voluntar y, and further, since this
is opposite for the other timef rame group (i. e., other timef rame buyers
consider an opportunity differently than would other timef rame sellers)
and the market place needs to facilitate trade, it means that all
participants - other timefram e buyers and sellers, and day timef rame
buyers and sellers - will be involved in the market over a large sample
size of

78 MARKETS AND MARKET LOGIC transactional data. Also, as market values

change, the activ ity level of the isola ted groups will show change. It is
the change in the percentage mix which changes the direction of a market.
The day time frame trader tries to make a trade at a fair price for that
day's timef rame in order to facilitate trade. Meanwhile, the other time
frame trader looks to take advantage of a market-cr eated opportunity in his
timeframe. Transactions generated by day time frame traders usua lly are the
vast majority of all prices on any given day, but do not occur uniformly
throughout the range of prices. The percentage of such a day's market
activity is generally 40 to 90%, and the percentage of transactions
attributed to other timeframe participa nts is general ly 10 to 60%. This
percentage can be more or less at any single price. In other words, the
respective percentage activity of each type of trader varies within the
produced range. This is constantly changing in response to differing
degrees of imbalance caused by the other timeframe participa nt, and the
resulting adjustment of the day time frame participant, creating four
different types of day structur es. The purpose of facilitating trade is to
establish a fair price in the day timefr ame. The market accomplishes this
by producing a range of activity whereby directional price changes serve
two purpo ses: first, to halt the impetus of buying or selling, or to
decrease the amount of buying or selling; second, to provide enough time
for an opposing response so that a fair area fo r trade is discovered.
Initial Balance Area 9526 K 9525 KL 9524 KL 9523 KL 9522 KL 9521 JK L
9520 GJ KL 95 19 GHJKL 95 18 GH JK L 95 17 GHIJL 95 16 GHIJL 95 15 BGHIJL
95 14 BGIJL 95 13 BFG 951 2 BFG 951 1 BCFG 95 10 ABCDF 9509 ABC DF 9508
ABCDF 9507 ACEF 9506 ACE 9505AE 9504 A 9503 A 9502 A This is a Mark et
Profile of a U.S. Treasury Bond futur es contract. The day's low (9502) and
the two immedia tely higher price levels displa y mark et rejection, caused
by a high level of activity on the part of the other timeframe buyers. This
high level of OTF buying activity at 9502, 9503 and 9504 resulted in
increased competition to buy, forcing prices higher . Note that during the
subsequent (B) period , price moved high enough to shut off buying, which,
by the end of C period , displa yed a balanced area until later in the
day.

ILLUSTR ATIVE EXAMPLES 79 Within this fram ework, a sharp price movement
during the day has the characteri stic of first reducing the amount of
directional activit y causing the change. This seems to contradict the
statement that the market exists to facilitate trade, but does not when
the motives of the day timef rame trader and the floor local are taken into
account. A sharp price movem ent thus eventually brings about a discovery
of balance, allowing trade to continue. The market is buying time so that
the other timef rame trader opposite this price move has time to react and
place orders to take advantage of this oppor tunity during the session.
The day timef rame trader relies on using market-generated informa tion as a
short timef rame benchm ark. This trade r is the most sensitive barometer of
change. He is the first to react to a change in the market. This group
consists mostly of floor parti cipants or "locals ," and has the
characteristic of extracting an edge (buying at the bid and selling at the
offer) for providing liquidity. The edge is a small markup or markdown
in the bid and ask price. Other timef rame traders tend to apply outside
information to the market as it relates to their own situation. Futures
markets control themselves through the use of time in relation to the
timeframe participants. The day timeframe trader effects the immedi ate
balance in order to facilitate trade. The market has a secondary balance
when the initial balance is changed by the other timeframe trader acting
on the initial balance as a market-created opportunity. He takes action,
either because he views the market created situation as attrac tive for
his own situation, or because the market forces his activity as his
anxiety increas es. The effect in either case is a range extension beyond the
initial hour's previous high/ low. Markets: Organized and Defined As
stated in an earlier chapter and mentioned again in this one, the
"chaos" of pit activity -- price activit y moving over time, caused by the
activity of the different timef rame participants -- can be organized into
statistically measurable half-hour units. When transactional data are
formatted into a readable form of order using normal distribution or the
bell curve, information becomes readable. This has revealed what is called
the Market Profile, a real time tool that captures and defines the
marketplac e. In other words, it captures and defines the day structure
of the market, and allows an accurate reading of the eff ect the other
timef rame trader has in shaping range development. Thus, the level of activit
y and type of influe nce that each timefram e group exerts on the market can
be read and understood when arranged into the Market Profile.

80 MARKETS AND MARKET LOGIC Isolating On Key Activity By organizing

market activity with the Market Profil e, one can read and understand the
cause of directional continuation, change or climax. Whether a market will
experience directional continuation, change or climax rests on if and to
what degree the other timef rame trader enters the market, as demons trated
in earlier brief examples. Knowing how this occurs is the key to
entering succes sful (risk-f ree, as will be explained later) positions,
mainly for two reasons introduced earlier. For one, the other timeframe
traders as a group do not change their opinion on the market quickly.
Secondly, other tirneframe buyers do not buy from other timeframe sellers,
and vice versa, and only one long timef rame group (either long timef rame
buyers or long timeframe sellers) can be active at a price at the same
time. Consider the fact that the other timef rame trader does not have to
enter the market, or he can enter, and can do so either patiently or very
anxiously. If the other timef rame trader is completely absent, the
market 's initial balance area - market activity in the first hour - will
be undi sturbe d. If he is entering the market quietly or patiently, he can
overcome a market by consi stently and patiently using price orders to
overwhelm the market 's directional impact. When the other timef rame trader
enters patiently, he is entering on the extrem es of the day, taking advantage
of market-created opportu nities. When he has a little more anxiety, he
enters the market with enough force to upset the initial balance area,
thereby expanding or extending the range directionally. In doing so, he
usually removes a tempo rary known unit of informa tion, one extreme
established during the first hour of trade . When his needs are getting
away from him and thus he is quite anxious, he enters the market quietly
and consi stently all day, upsetting each new balance area as it is form ed.
Lastly, when his anxiety is highest, he compl etely overwhelms the initial
balance area, causing a new value area to be developed far away from the
first. As in all markets, but particula rly futures markets where 4% of the
contracts traded are actually delivered, almost all participa nts have to
exit their positions. Once a buyer has bought, he becomes a seller, and
vice versa. Furthermore , all are free to change their timefram es. Thus,
once they are in the marke t, both other timef rame and day timef rame
traders need to reverse their position. Where the majority of day
timeframe traders must fight the market -imposed timeframe (the close) the
majority of other time frame sellers must then become a lon g timeframe
buyer somewhere within the range of patience- to-anxiety. Either can chan ge
his timef rame. In summary, the types of range development are shaped by
either of the two timeframe partici pants in our group. As the degree of
balance is changed, the control of the market shifts between these two

ILLUSTRATIVE EXAMPLES 81 groups, leading to differing opport unities.

Preface To Market Profiles This concludes the first section of chapter 10;
the theor etical discussion of how futures markets operat e similarly to all
other mark ets. You have glanced at how futures markets operate in the
day timef rame. Next, to illustrate all that has been discussed thus far in
this book, ten days of market activity in the Chicago Board of Trade
treasury bond futures market and the Boar d's soybean market will be
examined. These two markets will be presented and analyzed in profile form.
While other organized markets are motivated by the same principles and
are simply variations of these markets, these two markets have been
chosen because data were readily available, pro vided by the Chicago
Board of Trade. The discussion of the profiles will be presented in three
steps: Step 1. Actual profiles of transactional data will be presented.
Underneath each profile, all the major informa tion regarding a) how value
establishes itself and b) the activ ity of the other timef rame buyers
and sellers will be introduced. Step 2. A running commen tary will
interpret a ) how value establ ishes itself and b ) what the level of
activity of the other time frame buyers and sellers reveals about the
market. Step 3. Points at which the market offe red free exposur e will be
located and discussed. The discussion of these two markets is a very
simplified one. In other words, the profiles are not going to be analyzed
from the standpoint of the short-term market-generated inform ation. Instead,
the following will isola te, extract, categorize and analyze only the
longer range activity of the other time frame trader, focusing on how
important his participation is in influencing the condition of the market
throughout each day's range. In other wor ds, the purpose of this examination
and discussion of profiles is to illustrate the impact the other timef rame
participant has on both intra-day range development and longer term tren
d. It should be noted that the following profiles contain a great deal more
inform ation that will not be explained in the discussions that follow
the profiles. In order to extract this information, several logical
deductions pertaining to market activit y have been made.

82 MARKETS AND MARKET LOGIC Logical Deduc tions The authors ' deductions
taken from studying the market within the context of the bell curve and
distinguishing between the activ ity of each type of parti cipant are as
follows: Any activity within the first two time periods comprises the
initial balance. This balance discovered by the day timef rame trader
reacting to any influx or other timef rame activity. Range extension is
an upsetting of this initial balance. Exte nsion of the day's range during
the second half hour time period is attri buted to the local or day timef
rame auction, and is repr esentative of the day timef rame trader 's
attitude. This is importa nt because, as stated earlier, the day timef rame
trader is the participa nt most attun ed to quick change in the condition of
the market and his attitude is of great informational value. Control shifts
to the other time frame trader at the end of the second half hour time
period. Subsequent auctions in either direction are defined by an
extension of range beyond the first two time periods. It is obvious that
range extension is caused by the other timef rame trader taking advantage
of a market-created opportunity, upse tting the initial balance. As the market
shifts between the control of the two timef rames, it is important to note
that the activity level of the other timef rame trader is the impor tant
point to monitor. At his maximum influence, where , as a group , his trade is
nearing 60% of the total daily volume, one can assume that his influ ence
in subsequent sessions will waver because the maximum influence is far above
his daily average. By the same token, if he is doing only a small
percentage of business, we can assume that within the market 's overall
purpose of facilitating trade, he will at some point have to become
active, and his activity can therefore be anticipa ted. There will be
situations in which the other timef rame buyer or seller dominates the
market for an extended period without the active participation of the other
tim efram e counter part. Still, because of the need to facilitate trade,
the market must go directionally far enough to •• end the auction " at
around the same point the opposite counter point begins his opposite
auction. The purpose of reading market activity is to gain a market under
standing, both for the day's activity and for longer term activity. To do
this, parameters must be developed so that in monitoring the market, one
has the ability to isola te, extract, categori ze, analyze and correctly
deduce from the following infor mation: who (short timef rame versus long
timef rame) is doing what (responsive selling versus initia tive selling;
respon sive buying versus initia tive buying) , when (during what timefra
me), and where (at what price). To oversimplify somewhat, the key to
entering succes sful positions is to know when the other timef rame buyer or
seller is beginning to get

ILLUSTRATIVE EXAMPLES 83 active traders , and to position yourself in the

market in that direction. Once the who, what, when and where have been
properly isolated, categorized and analyzed, one can deduce the why,
since a par ticipant 's needs are expressed in his market participation. In
order to read market activity in the futures market, we will isola te,
extract and categorize other timef rame activity, focusing in on and
montioring four portions of each profile: 1. The value area and how it
changes, both directionally and in terms of its high-low range. Monitoring
this indica tes how the market is facilitating trade. The range of value
area as defined by 70% ofthe day's volume and its location (higher or lower
than the previous day) are illustrated in the lower left hand portion of
each profile. This information is impor tant when one is conside ring
whether or not the market is facilitating trade. 2. The high and low
extremes of the daily range. They are examined to discern the extent to
which the other timeframe traders are active at relatively high and low
prices. Daily extrem es are known loca tions where other timef rame activity
is expect ed. Our deduction is that any time more than a single print
exists, other timeframe activit y is indicated. However, if the daily
extreme is made during the last time period in the day, the authors do not
count them , as this price level has not been tested over time.
Monitoring the high and low extrem es indicate whether the other timef rame
trader influences the change in value in a voluntary way by responding to
market-created opportunity. Monit oring the level of activity at the
extremes helps determine the degree of influence that the other timef rame
partici pants exercise in creating change in value or trend. For example,
other timef rame selling at the top of a day's activity indic ates that the
other timeframe seller is at least mildly active. 3. The occur rence of
range extens ion. Monitoring this indic ates the other timef rame particip
ant's activity in producing a change in the market 's initial balance. Range
extension indica tes that the other timef rame partici pant is very active,
not only taking advan tage of a market-created opportunity at the extrem e,
but also at lower prices. In other words, when range extension occurs,
the other timef rame trader is upsetting the initial balance of the
market, a more aggr essive activity level than acting on the extremes
indicates. 4. Lastly, the most complica ted calculation: the net buying or
'

84 MARKETS AND MARKET LOGIC selling of the other time fram e trader in
the fair traded time-price opportunity area, as measured by the time-price
opportunity (TPO) count. This indication allows one to monitor whether
other timeframe participation in that day's value area is net selling or
net buying. Our determination of net buying versus net selling comes from
taking the difference in time-price opportunities above and below the
highest time-price price nearest the middle of the day's price range. A
number above/a number below results. A high number in the numerator (top)
indicates net selling, and a high number in the denominator (bottom) indica
tes net buying by the other timeframe trader. There are numerous complex
explanations for this, but to illustrate simply why it is so, consider the
fact that the market must continually adjust to the cause upsetting the
balance of the marketplace. It thereby moves direc tionally in order to keep
a fair balance and facilitate trade. The low number is the net adjustment
number which shuts off the activity. When you have two distribu tions in a
profile that are separated by a single time-price opportunity, it is clearly
a trend day, and during trend days, the other timef rame trader's activity
is very high. It is therefore not necess ary to count the fair traded area
in a trend day, as it is obvious that other timef rame activity in the
direction of price is evident. Further, these last three indica tors (2,
3, and 4) will be categorized as either: a. Initiative activity or b.
Responsive activity Both types are volu ntary activit ies, and monitoring the
activity of both long timef rame buyers and sellers as they vacillate
between initia tive and respo nsive activit y is the main information
required to monitor the long-term auction process. Understanding each group
's prim ary stance denotes the activity level of the large sample size
auction. This distinction yields trem endous market information and can be
made by attributing the activity of the changing value area to the group
causing the change. (For example, when lower values are brought about by
initiating sellers, a response from buyers who are responding to a market-
created opportunity is present but passive, and vice versa. ) The fo llowing
analysis is put fo rth not for the purpose of illustrating day-trading
techniques, but rather to present a set of cir cumstances to support
decision making when one is working with a large sample size of data. This
informa tion is going to be extracted and organized so that a set of
circumstances for decision making can be underst ood. If this can indeed be
accomplished, then one should be able to distinguish

ILLUSTRATIVE EXAMPLES 85 between high-risk, low-r isk and no-risk

opportunities and relate each to one's own individual situation, consi stently
generat ing sound deci sions.

86 MARKETS AND MARKET LOGIC US Treasury Bonds Step 1 Trade Price 78

29/32 78 28/32 78 27/32 78 26/32 78 25/32 78 24/32 78 23/32 78 22/32
78 21/32 78 20/32 78 19/32 78 18/32 78 17/32 78 16/32 78 15/32 78
14/32 78 13/32 78 12/32 78 11 /32 78 10/32 78 9/32 78 8/32 78 7/32
78 6/32 78 5/32 70% Range of Daily Volu me % of Volume 378 1294 1462
6444 6778 12248 14878 13538 10542 14820 14026 1401 4 9584 12222 9268
4594 1410 2572 8702 9672 13552 9772 6284 2988 3110 144418 Total CTI1%
0.2 59.5 0.6 52.6 0.7 56.2 3.2 44.7 3.3 57.6 6.0 60.2 7.3 56.6 6.6
56.6 5.2 60.1 7.3 55.6 6.9 62.5 6.9 57 .9 4.7 53 .4 6.0 51.6 4.5 54.3
2.3 41.1 0.7 54.2 1.3 53.8 4.3 59.7 4.7 63 .5 6.6 64 .1 4.8 63 .1 3.1
57 .7 1.5 66.7 1.5 42.6 70.7 56.0 78 14/32 to 78 27/32 Total Volume
for Sep 85 US Bonds Total Volume for US Bonds CTI2% 7.9 13.1 11.4 10.0
17.3 12.4 13.6 16.1 10.6 12.7 15.4 13.4 12.5 16.1 13.9 35.9 16.5 12 .5
18.2 9.8 11. 6 8.0 16.1 12.5 26.8 14 .4 Total Spread Volume for Sep 85
US Bonds 2041 52 219568 2296 7-8 Value area : 7814-7827 Initia ting 1)
Sell ing at top Initiating 2) Downside range exte nsion Half Hour Bracket
Times At Which Prices Occurred A A A A,B A,B,E A,B,D,E A,B,D, E,F
A,B,C,D,E,F A,B,C/D,E/F,G A,B,C,D,F,G A,B,C,D,F,G A,B,C, D,F,G B,C,G,H, I
B,C,G,H,I,J B,G,H, I,J H,I, J H,J J J J,K, L,M J,K,L,M J,K,L K,L K,L K
A,B,C,D ,E,F ,G,H,I, J % of Total CTIl CTI2 57.3 57 .3 39.9 14 .1 14.5
19.4 Initia ting 3) TPO count indicates sell ing (trend day)

ILLUSTRATIVE EXAMPLES 87 Trade % of Half Hour Bracket Times Price Volu

me Total CTIl% CTI2% At Which Prices Occurred 78 23/32 702 0.3 59.3
0.1 I 78 22/32 3302 1.2 59.4 10.4 H,I 78 21/32 5716 2.1 57.8 16.7
H,I 78 20/32 6100 2.2 60.9 15.6 H,I 78 19/32 4226 1.5 61.3 7.3 H,I
78 18/32 3532 1.3 60.4 14.9 H,I 78 17/32 5970 2.2 55.8 14 .7 G,H, I
78 16/32 6544 2.4 53.3 8.0 G,H, I 78 15/32 7790 2.8 54.8 19.2 G,H, I
78 14/32 9996 3.6 54 .7 10.2 F,G,H , I 78 13/32 12080 4.4 54.7 8.3
F,G,H,I,J 78 12/32 12334 4.5 54.5 16.5 E,F,G, I,J 78 11/32 13094 4.7
55.9 20.5 E,F,G, I,J,K,L 78 10/32 22578 8.2 58.8 12.4 E,F,I,J,K ,L,M 78
9/32 23150 8.4 57.8 11. 0 E,F,I,J,K ,L.M 78 8/32 16528 6.0 59.5 12.4
D,E,F,J,K,L 78 7/32 11490 4.2 64 .1 12.1 D,E, F,J,K,L 78 6/32 12046 4.4
58.7 12 .1 D,E,J,K,L 78 5/32 3782 1.4 54.0 5.6 D,E 78 4/32 2570 0.9
56.3 17.3 D 78 3/32 5682 2.1 63.9 16.2 A,D 78 2/32 5150 1.9 60.6
15.1 A,B,C,D 78 1/32 11020 4.0 63.3 14.4 A,B,C,D 78 21734 7.9 56.4 8.9
A,B,C,D 77 31/32 16764 6.1 61.8 13 .9 A,B,C 77 30/32 13452 4.9 60.6
13.1 A,B,C 77 29/32 8536 3.1 65.5 6.7 A,B 77 28/32 6274 2.3 60.6 7.8
A,B 77 27/32 2882 1.0 51.5 2.9 A 77 26/32 1270 0.5 55.8 0.8 A 203538
73.7 57.8 12 .6 A,B,C,D,E, F,G,H , I ,J,K ,L,M 70% Range 78 of Daily to
Volume 78 17/32 % of Total CTIl CTI2 Total Volu me for sep 85 US
Bonds 276294 58.6 12 .3 Total Volu me for US Bonds 285482 58.9 12 .0
Total Spread Volume for Sep 85 US Bonds 2648 65.6 7.7 7-9 Value area :
7800-7817 Responsive 1) Buying at bottom Respons ive 2) Upside range
extension Responsive 3) TPO count indicates buying (trend day)

88 MARKETS AND MARKE T LOGIC Trade % of Half Hour Bracket Times Price
Volu me Total CTIl% CTI2% At Which Prices Occurred 78 18/32 790 0.4
58.5 9.0 B 78 17/32 5524 2.9 54 .9 11.3 B 78 16/32 7546 3.9 55.1
18.4 A,B 78 15/32 13186 6.9 57.1 15.2 A,B,D,E,F,H 78 14/32 19176 10.0
55.7 15.9 A,B,C,D,E,F,H 78 13/32 18614 9.7 59.9 13.0 A, B, C,D,E, F,H, I
78 12/32 12600 6.6 55.6 14 .1 A,B,C,D,E,F ,H,I,K 78 11/32 16308 8.5 60.9
9.5 A,B,C, D,E, F,H, I,J,K,L 78 10/32 21420 11.1 55.3 16.1 A,C,D,
F,G,H,I,J,K,L 78 9/32 21766 11. 3 62.9 10.2 C,D,F ,G,H,I,J,K,L 78 8/32
15728 8.2 56.1 12.4 C,F,G,H, I,J,L 78 7/32 7528 3.9 58.0 13.3 F,G,J,L
78 6/32 3790 2.0 55.2 6.7 F,L 78 5/32 2474 1.3 56.5 7.0 L 78 4/32
4140 2.2 65.6 6.1 L 78 3/32 2748 1.4 60.3 5.2 L 78 2/32 1760 0.9
47.7 28.6 L 78 1/32 4140 2.2 47.9 22.6 L,M 78 7980 4.2 58.4 9.6 L,M
77 31/32 3560 1.9 56.6 7.0 L,M 77 30/32 1340 0.7 56.3 13.8 L,M 138798
72 .2 58.1 13 .3 A,B,C,D ,E,F ,G,H, I,J,K,L 70% Range 78 8/32 of Daily to
Volume 78 15/32 % of Total CTIl CTI2 Total volume for Sep 85 US Bonds
192118 57.7 13.0 Total Volu me for US Bonds 199140 58.2 12.6 Total
Spread Volume for Sep 85 US Bonds 756 56.3 4.8 7-10 Value area: 7808 -
7815 Initia tive 1) sell ing at top Initiative 2) Downside range extension
Initiative 3) TPO count indicates even balance

ILL USTRATIVE EXAMPLES 89 Trade % of Half Hour Bracket Times Price

Volume Total CTIl% CTI2% At Which Prices Occurred 77 27/32 54 0.0 72 .2
0.0 A 77 26/32 586 0.2 49.8 4.4 A 77 25/32 1458 0.6 57.4 9.1 A 77
24/32 1248 0.5 43.8 9.3 A,C,D 77 23/32 9590 3.9 59 .4 12 .8 A,B,C,D 77
22/32 19778 8.1 57.9 12.8 A,B,C,D,E 77 21/32 22622 9.2 65.2 8.9
A,B,C,D,E 77 20/32 21054 8.6 63.1 11. 4 A,B,C,D,E 77 19/32 13936 5.7
59.6 15.9 A,B, C,E 77 18/32 9070 3.7 61. 0 10.4 A,B,E 77 17/32 7360
3.0 59.7 8.8 B,E 77 16/32 3264 1.3 48.5 16.6 B,E 77 15/32 9914 4.0
57.1 12 .1 E,F,G 77 14/32 10768 4.4 56.6 8.4 E,F,G,H 77 13/32 10964
4.5 60.8 12.3 E,F,G,H,J,K 77 12/32 20766 8.5 59.1 14 .3 F,G,H, I,J,K 77
11/32 16752 6.8 62 .1 11.7 F,G,H, I,J,K 77 10/32 12552 5.1 61. 0 7.8
F,G,H, I,J,K 77 9/32 9260 3.8 65.1 10.1 G,I,J ,K, L 77 8/32 9740 4.0
55.7 12.6 G,I,K ,L 77 7/32 7740 3.2 60.1 13 .2 I,K,L,M 77 6/32 11468
4.7 60.2 15.6 K,L,M 77 5/32 10592 4.3 54 .5 16.4 L,M 77 4/32 4746 1.9
47.0 9.0 L 77 3/32 264 0.1 81. 4 3.8 L 175838 71.6 60.3 11. 9
A,B,C,D,E, F,G,H, I,J,K 70% Range 77 11 /32 of Daily to Volume 77 23/32 %
of Total CTII CTI2 Total Volu me for Sep 85 US Bonds 245546 59.7 11.9
Total Volume for US Bonds 262212 59 .8 11.2 Total Spread Volume for sep
85 US Bonds 2692 60.6 5.0 7-11 Value area: 7711-7723 Init ative 1)
Selling at top Init ative 2) Downside range extension Init ative 3) TPO
count indicates sell ing

90 MARKETS AND MARKET LOGIC Trade Price 77 18 /32 77 17/32 77 16 /32

77 15/32 77 14/32 77 13/32 77 12 /32 77 11/32 77 10/32 77 9/32 77
8/32 77 7/32 77 6/32 77 5/32 77 4/32 77 3/32 77 2/32 77 1/32 77 76
31/32 76 30/32 76 29/32 76 28/32 76 27/32 76 26/32 76 25/32 76 24/32
76 23/32 70% Range of Daily Volume % of Volu me 2314 3270 3808 10678
15846 13352 14360 5460 10866 15892 15094 6978 4134 5244 3306 2720 7946
9704 7452 11642 16404 17644 26388 11974 9476 10708 1231 2 926 185018 76
24/32 to 77 9/32 Total 0.9 1.3 1.5 4.2 6.2 5.2 1.7 2.1 4.2 6.2 2.0
2.7 1.6 2.0 1.3 1.1 3.1 3.8 2.9 4.5 6.4 6.9 10.3 4.7 3.7 4.2 4.8
0.4 72.3 CTIl% 58.9 58.9 61.4 60.6 57.3 62.7 62.7 59.6 55.4 60.2 59.0
62.9 44.3 59.9 61. 4 61.6 54.8 55.4 58.6 56.1 55.1 55.6 52.3 61. 5
58.3 56.7 55.7 48.7 56.6 Total Volu me for Sep 85 US Bonds Total
Volume for us Bonds CTI2% 3.4 12 .3 10.8 15.5 10.4 9.0 8.4 13 .6 13.8
13.9 9.3 14.8 24.4 19.0 12.4 12.0 11. 3 12 .1 12 .9 12 .7 13 .6 11. 5
19.9 13.1 9.5 18.2 9.2 13 .9 14.1 Total Spread Volu me for Sep 85 US
Bonds 255898 271210 2462 7-12 Value area : 7624-770 9 Initia tive 1) Sell
ing at top Initiative 2) Down side range exte nsion Initia tive 3) TPO
count indicates sell ing Half Hour Bracket Times At Which Prices Occurred
A A A A.B , L A , B, L ,M A , B,L,M A, B , L A,B,L A, B , L A, B , L A ,
B,L A, B , L B , L C , L C,K,L C ,H,J,K,L C ,H,I,J,K C,H, I,J,K C,E,G,H,I,J
C , E,F,G,H,I,J C,E,F ,G,H,I,J C,D,E,F,G,H C,D,E,F C,D,E, F C , D,F C,D, F
C,D C,D A , B , C ,D,E,F ,G,H ,I,J,K , L % of Total CT Il CTI2 57.3 57.5
52.4 13 .4 12 .6 0.0 (climax trend day taken out late )

ILLUS TRATIVE EXAMPLES 91 Trade % of Half Hour Bracket Times Price

Volume Total CTIl% CTI2% At Which Prices Occurred 77 18/32 2048 1.3
50.6 15.9 L 77 17/32 5544 3.5 69 .6 8.0 L 77 16/32 5000 3.2 62 .5
6.0 F,L 77 15/32 4754 3.0 57.3 9.8 F,K,L 77 14/32 13502 8.6 54.6 12.9
E,F,K,L 77 13/32 16464 10.5 55.0 7.9 E,F,G,H,J,K,L 77 12/32 18192 11. 6
54.7 11. 5 C ,D,E,F,G ,H,I,J,K ,L,M 77 11/32 19368 12.3 62.1 9.2
C ,D,E,F ,G,H, I ,J,K ,L,M 77 10/32 22230 14.1 53.5 13 .5 B,C,D,E,G,H,I,J
77 9/32 8032 5.1 60.4 12 .2 B , C ,D,G,H, I,J 77 8/32 4016 2.6 60.6 7.7
A , B , C ,G,H 77 7/32 6038 3.8 61. 6 5.9 A , B 77 6/32 7510 4.8 60.5
8.3 A , B 77 5/32 4396 2.8 66.3 9.1 A , B 77 4/32 4476 2.8 64 .4 9.4
A , B 77 3/32 7502 4.8 61. 0 16.2 A 77 2/32 2700 1.7 56.9 19 .1 A 77
1/32 1974 1.3 60.1 14 .7 A 77 3442 2.2 47.2 25.5 A 115352 73.4 57.1
10.6 A,B,C,D,E, F,G,H, I ,J,K ,L,M 70% Range 77 6/32 of Daily to Volume 77
14/32 % of Total CTIl CTI2 Total Volume for Sep 85 US Bonds 157188 58
.1 11.1 Total Volume for US Bonds 165006 58.2 10.9 Total Spread Volume
for Sep 85 US Bonds 3357 48.9 24.9 7-15 Value area : 7706 -7714 Init
iative 1) Buying at bottom Initia tive 2) Upside range exten sion
Initiative 3) TPO count indicates buying
92 MARKETS AND MARKET LOGIC Trade Price 77 25/32 77 24/32 77 23/32 77
22/32 77 21/32 77 20/32 77 19/32 77 18/32 77 17/32 77 16 /32 77 15/32
77 14/32 77 13/32 77 12/32 77 11 /32 77 10/32 77 9/32 70% Range of
Daily Volume % of Volume 606 5452 12830 14058 20358 30964 22642 2339 8
15360 12996 16212 14056 11488 9108 6678 3362 1340 155988 Total 0.3 2.5
5.8 6.4 9.2 14 .0 10.2 10.6 7.0 5.9 7.3 6.4 5.2 4.1 3.0 1.5 0.6 70.6
77 15/32 to 77 22/32 CTIl% 48.2 54 .2 55.2 56.3 57 .5 58 .3 61.9 57.2
61. 9 57.2 53 .2 59 .0 56.7 59.6 56.7 48.7 43.4 58.1 Total Volu me for
Sep 85 US Bonds Total Volu me for US Bonds CTI2% 9.2 7.3 14 .4 14 .1
14 .2 12 .9 12 .5 15.3 11. 0 7.1 19 .7 15.1 8.6 9.9 6.8 13 .1 43.4
13.5 Total spread Volu me for Sep 85 US Bonds 220908 228754 2329 7-16
Value area: 7715-7722 Initia tive 1) Buying at bottom Half Hour Bracket
Times At Which Prices Occurred L,M D,K, L,M B,D,K,L,M B,D,E,J,K,L
B,D,E,F,J,K,L B,C,D ,E,F , I,J,K,L A,B,C,D,E, F,G, I,J,K,L A,B,C,E,F,G,I,J,K
A,B,F,G, I,J A,B,F,G,I,J A,G, H,I A,G, H,I A,G,H,I A,G,H G,H G G
A,B,C,D,E,F,G ,H,I,J,K,L % of Total CTIl CTI2 57.6 57.4 36.5 13 .1 13 .0
28.6 Initia tive 2) Both upside and down side range exte nsion; both fail
ing Initia tive 3) TPO count indicates buying

ILL USTRATIVE EXAMPLES Trade Price 78 12/32 78 11/32 78 10/32 78 9/32

78 8/32 78 7/32 78 6/32 78 5/32 78 4/32 78 3/32 78 2/32 78 1/32 78
77 31/32 77 30/32 77 29/32 77 28/32 77 27/32 '77 26/32 77 25/32 77
24/32 77 23/32 77 22/32 77 21/32 77 20/32 77 19/32 77 18/32 77 17/32
77 16 /32 70% Range of Daily Volume % of Volume 914 5006 7604 8628
7326 5528 7256 10162 13386 1741 4 17628 15056 5206 3650 13198 13584
20864 10408 14366 20124 21248 19052 9426 7452 19020 9934 7198 3214 972
227414 77 18/32 to 78 2/32 Total CTIl% 0.3 1.6 2.4 2.7 2.3 1.8 2.3
3.2 4.3 5.5 5.6 4.8 1.7 1.2 4.2 4.3 6.6 3.3 4.6 6.4 6.7 6.1 3.0 2.4
6.0 3.2 2.3 1.0 0.3 72.2 60.1 59.5 55.3 55.0 49.2 61.1 63.0 53.2 54.7
54.5 58.3 52.0 47.2 48.9 57 .9 58.0 54.7 52.8 57.3 56.7 53.9 54.4 54.0
50.4 54.4 59.0 58.0 58.4 49.7 55.2 Total Volume for Sep 85 US Bonds
Total Volume for US Bonds CTI2% 0.5 14.6 7.5 9.1 19.6 8.4 10.8 12.4
15.0 12 .9 7.7 13 .0 12 .9 16.1 12.7 14.1 12.8 8.8 8.9 14 .8 14.9 15.7
8.7 15.4 16.0 10.0 9.0 13.3 0.6 12 .7 Total Spread Volume for Sep 85
US Bonds 314824 331990 8615 7-17 Value area : 7718-7802 93 Half Hour
Bracket Times At Which Prices Occurred A A A A A A A,C A,C,D A,B,C,D
A,B,C,D A,B,C,D,L ,M B,C,D,L ,M B,D,L,M D,F,L D,E,F,L D,E,F,G,L D,E,F,G,L
D,E,F,G,L D,E, F,G,K,L E,F,G,H,J,K,L E,F,G,H,J,K,L F,G,H,J,K F,G,H, I,J,K
F,H, I,J H,I,J H,I,J H,I,J H H A,B,C,D,E,F,G,H,I ,J,K ,L,M % of Total CTI1
CTI2 55.3 55.3 50.6 12 .6 12 .4 17 .6 Respons ive 1) Sell ing at top ,
buying at bottom Respons ive 2) Downside range extension Initia tive 3)
TPO count indicates buying

94 MARKETS AND MARKET LOGIC Trade Price 77 27/32 77 26/32 77 25/32 77

24/32 77 23/32 77 22/32 77 21/32 77 20/32 77 19/32 77 18/32 77 17/32
77 16/32 77 15/32 77 14/32 77 13/32 77 12/32 77 11/32 77 10/32 77
9/32 77 8/32 77 7/32 77 6/32 77 5/32 77 4/32 77 3/32 77 2/32 77
1/32 77 76 31 /32 76 30/32 76 29 /32 76 28/32 76 27/32 76 26/32 76
25/32 76 24/32 76 23/32 76 22/32 76 21/32 76 20/32 76 19/32 76 18/32
76 17/32 70% Range of Daily Volume % of Volume 7168 5974 4468 2420
2350 2512 778 528 7946 5826 1336 1762 1350 2528 1400 1116 984 4080
9012 10334 6358 13430 11640 15460 21760 23092 20822 15116 10020 6992
10502 13272 12928 8974 5252 2960 4484 3474 3346 2130 8322 6470 888
235438 76 20/32 to 77 10/32 Total CTIl% 2.1 67.5 1.8 63.3 1.3 60.0
0.7 56.2 0.7 55.2 0.8 58 .0 0.2 53.2 0.2 46.8 2.4 58 .7 1.7 54.1 0.4
61.0 0.5 42.3 0.4 59.0 0.8 59.6 0.4 51.6 0.3 41.4 0.3 62 .1 1.2 55.7
2.7 58.2 3.1 54 .0 1.9 58.8 4.0 56.5 3.5 55.2 4.6 56.2 6.5 53 .1 6.9
55.6 6.2 57 .9 4.5 55.4 3.0 60.1 2.1 57.7 3.1 55.3 4.0 58 .6 3.9
58 .5 2.7 51.0 1.6 53 .5 0.9 59.1 1. 3 56.4 1. 0 52 .6 1.0 56.6 0.6
55.1 2.5 58 .2 1.9 50.1 0.3 50.0 70.3 56.1 Total Volume for Sep 85 US
Bonds Total Volume for US Bonds Total Spread for Sep 85 US Bonds 7-18
Value area : 7620-7710 Initiati ve 1) Sell ing at top CTI2% 3.9 13 .7 12
.8 8.8 3.6 9.6 18.3 2.8 9.6 23.7 21.7 23.4 11. 0 15.7 11. 2 5.1 5.8
6.6 17.3 16.0 12 .6 17 .1 12.3 12.9 15.3 13 .2 14 .4 13 .9 9.0 15.6 14
.7 10.0 12 .9 12.9 9.5 24.6 7.0 9.5 13.3 14.6 17.4 6.1 0.0 13 .5
334752 375510 6460 Initia tive 2) Downside range extension Respons ive 3)
TPO count indicates buying Half Hour Bracket Times At Which Prices
Occurred A A A A,B A,B B B B B B B B B B B B B B B,C B,C B,C
B,C B,C,F,J B,C,D,E,F ,G, I,J B,C,D,E,F,G,H,I,J,K B,C,D,E,F,G ,R,I,K
B,C,D,E,F, G,H, I,K B,C,D,E,F ,G,H,K B,C,D,E,F ,G,H,K C,D,F,G,H,K C,F,G,H,K,L
C,F,H,K,L C,F,K,L C,F,K, L e,F,K ,L, C,L L L L L L,M L,M L,M
B,C,D,E,F ,G,H , I,J,K,L % of Total CTIl CTI2 56.5 55.9 44.7 13.7 13 .0
33.3

ILL USTRATIVE EXAMPLES 95 Trade % of Half Hour Bracket Times Price

Volume Total CTIl% CTI2% At Which Prices Occurred 76 29/32 2332 1.0 43.4
36.0 A 76 28/32 3706 1.6 64.1 11. 3 A 76 27/32 2334 1.0 65.3 14.0 A
76 26/32 2716 1.2 59.5 14.8 A 76 25/32 4112 1.8 67.6 7.5 A 76 24/32
5994 2.6 57 .3 12 .7 A,B 76 23/32 8042 3.4 59.6 9.7 A,B 76 22/32 7360
3.2 62.2 9.8 A,B 76 21/32 7690 3.3 67.4 8.9 A,B 76 20/32 12276 5.3
58.5 21. 0 A,B,K 76 19/32 10150 4.3 58.0 14.2 A,B,K , L 76 18/32 8132
3.5 58.3 9.8 A,B,K, L 76 17/32 6708 2.9 57.3 14.9 A,B,H,I,K,L 76 16/32
9422 4.0 55.7 16.7 B,H, I,K,L 76 15/32 11180 4.8 48.5 9.9 B ,H,I,J ,K,L
76 14/32 12838 5.5 49.5 14 .8 B,G,H,I ,J,K ,L,M 76 13/32 11922 5.1 52.0
6.9 B,F,G,H,I,J,K,L ,M 76 12/32 13334 5.7 51.9 15.9 B,E,F ,G,J,K,L 76
11/32 20886 8.9 54.8 15.8 B,C,D,E,F,G ,J,K,L 76 10/32 28452 12.2 56.5
15.1 B,C,D,E,F,G,J,L 76 9/32 10878 4.7 54.0 15.5 B,C,D ,E,F ,G,J,L 76
8/32 9380 4.0 62.8 14.7 C,D,E 76 7/32 10688 4.6 60.1 17.5 C,D,E 76
6/32 10246 4.4 54.2 22.4 D 76 5/32 2550 1.1 53.4 12.0 D 76 4/43 122
0.1 42.6 0.8 D 164066 70.3 54.9 14.7 A,B,C,D,E,F,G ,H,I ,J,K,L,M 70%
Range 76 6/32 of Daily to Volu me 76 18/32 % of Total CTIl CTI2 Total
Volu me for Sep 85 US Bonds 223450 56.4 14.5 Total Volu me for US
Bonds 257734 56.7 13.5 7-19 Value area : 7606-761 8 Initiating 1) Sell
ing at top Init iating 2) Downside range exte nsion Initia ting 3) TPO
count indicates sell ing

96 MARKETS AND MARKET LOGIC Step 2 - Running Com mentary The activity of
the first day came from other timef rame sellers, who were present and
active throug hout the ran ge. They initia ted activity (disrupted the
initial balance) and in extending the range , drove the market down. The
second day brought lower values following a sharply lower opening. The
buying activity this day was the opposite of the first day's activity and was
made in response to the market-created opportunity as perceived by the other
timef rame buyers . This leaves the market in a bracketed area - a trading
range - where other timef rame seller s are active at high prices and other
timef rame buyers are actively buying at low prices. The key distinction
between the activity of the two groups is that the buying was responsive
(buyers responding to lower prices) while the selling was initiative
(sellers were not selling in response to high and attractive prices , but
were initia ting selling activity at lower prices). In other words, seller
s did not initiate new activity at the lower level, nor on the range extension
opportunity offered to them. This is a good illust ration of how a
directional price movement shuts off a very strong known activity. We've
seen initiating action by the other timef rame sellers and responsive
action by the other timef rame buyers . In trying to determine whether the
market is in a down auction, an up aucti on, or a stalemate - a trading range
- we can assume that any further initiating activity by the other timef rame
seller will definit ely indic ate that the market is in a down auction. This
is a safe deduction because such activity will mean that the market will
have to go lower - as it did in the instance above - to slow down and
eventually shut off selling activity. The third day indica tes selling
activity at the top of the range and again in a late downside range
extension. This is the initiating activit y which clarifies the market 's
situation. In looking at the early profile, it is clear that the value area
developing was small, and trade was not being facilitated, nor was the
market building higher values, as this area was within the previous day's
value area. The previous day's buying did not produce higher values than
the first day. On this third day, seller s were responding to the fair
balance by selling and caused range extension. The TPO count is even,
but only after L period, meaning that prior to L period, other timef rame
selling in the value area is indica ted as well. The fourth day, the market
was lower with a developing value area and activity that indica tes selling
at the top of the range , again resulting in downside range extension and again
in the value area, as indica ted by the TPO count. This again is
initiating activity at this new, lower level. Important also is the fact
that the range of the value area was larger than the previous day, where
trade early on was not being

ILL UST RATIV E EXAMPLES 97 fa cilitated. This signals continued downside

activity, since lower prices are facilitating increased trade. On the
fifth day, lower values developed in a similar way. The market showed
initiating selling in all three areas. Successive activit y from the other
timef rame sellers cannot be sustained at this level, as their percentage
of trade in this two-da y sample is far greater than normal. In the first
day of this two-da y samp le, sellers were probably responding to what then
presented a market-created opportunity, and the second day the activity was
probably due to a market-forc ing type of activity which usually brings a
temporary climax in anxiety. In other words, those desiring to sell have
probably covered their immediate needs while they await an opportunity to
trade at a more leisurely pace. We can assume that their activity level
should diminish in the short term and increase only on a market-created
opportunity such as a sharply higher opening. This is not to say that the
down auction has ended, because activity which occurred is not indica tive
of a change in the total auction. In fact, there really is more activit y
at this lower level than there was at the higher level. Clea r ly,
auctions end only when activit y is ended, which is not indica ted yet. The
sixth day brings slightly higher values in a narrow range. Initiating
activity comes from the other timef rame buyer, who bought the low end
of the range, and bought with sufficient fervor to create an upside range
exten sion, and had buying in the value area. This is initiating activity
because unchanged to higher values developed. The seventh day brings
slightly higher values. The low end of the range was again bought in
initiating activ ity by other timef rame buyers . Range extension on both
ends failed. The first failure brought an attempt to extend the range
to the downside. When that failed to create activity, it probed the
opposite side to find activit y in that directi on. When this also
failed, the market took its clue from the fact that there was buying on the
bottom and positive TPO count, and again probed for activity toward the
top. For the second day of higher values, the market again has a narrow
value area, indica ting that buying activity does not facilitate the degree
of trade participation that selling activity has done, thus leaving intact
the assumption that the down auction prevails. The dominant force
continues to be the other time frame sellers; having satisf ied their immedia
te needs during the past few days, they are awaiting the market-cr eated
opportunity for con tinued response. Looking at this day as a whole, it
provides substantial informa tion in that the market is in a neutral
situation. Sellers do not want to initiate activit y at these or lower
prices (although they may be forced to) nor are the buyers willing to extend
their activit y any fu rther than they have the last two days. The neutral
day is determined by the fact that no net influence exists. On the eighth
day the market opens sharply higher, and the other

98 MARKETS AND MARKET LOGIC timeframe seller responds by selling in the

high area of the range, in the range extension, and in the value areas
indica ted by TPO selling. The higher and wide- ranging value area indica
tes that many day timef rame buyers were active and that their volume is
greater than that of other timef rame traders. Thus, they had an
influence on the day's activity, but important to note, this has little
impact on the direction of the auction process. This is a good example of
other timef rame traders moving the market directionally in auctions
(trends) where price and value are opposite to the directional market
activity that occurred. On the ninth day, the market was lower with a
wider value area. Initiating selling occur red at the top of the range
and again in a downside range extension. The TPO showed a responsive
buyer activity. The market on the last day of the sample shows initiating
selling at the top of the range, a downside range extension and TPO selling,
all initiating other timef rame selling activity. Clearly, then, this is
the lowest possible value area at the end of our sample, yet the other
timeframe seller is as active as he was throughout the auction profile. Clea
r ly, the down auction is not over as we leave this sample, because the
activity of the other timef rame seller has not ended. This means that the
first step toward ending the downtren d will occur when prices go low
enough to shut off his initiating activity and bring about activit y on
the part of the other timef rame buyer, the participant who has been passive
throughout this study. The initia ting buying activity has never produced
the wide value areas indica ting trade facilitation. At a price level low
enough, the OTC buyer 's activity will begin to do so, and will produce
more trade than the initia ting selling activity prod uces. Step 3 -
"Free Exposure" Consider the situation most attrac tive to the market particip
ant -- that in which conditions are favorable for "free exposur e, " where
money will either be made or not, but it will not be lost in any substanti al
way. In seeking risk-f ree exposure, the first thing to note is the type
of auction structure in place. The bond market illustrated in the profiles
is in a down auction, as established early on. This can be seen by the
initiating activity on the first day and the lower values on the second. The
unchanged values on the third and the initiated activity being taken by the
other timef rame seller shows this continuing activity, and activity is
what makes the auction process contin ue. Positioning with this down
auction activity - even as late as the close on this third day - is a
risk-free exposure situation. In other words, at this point one needn 't
fear being late, because the other timef rame buyer is still not taking
an initiating sta nce, but remains passive. (The auction process cannot
change until roles are rever sed.)

ILLUS TRATIVE EXAMPLES 99 The opport unities for both buyer and seller are
clear ly not the same, since the other timef rame buyer does not trade with
the other timef rame seller. The day timeframe trader does not affect the
direction impact of the market, but only is monitored to isolate ongoing
trade facili tation. On the fourth day, the market has activity in all four
areas, and is facilitating trade. It must go lower to shut off this activity
and provides another safe selling opportunity . The following day the
activity is duplicated. This is rather late for one to enter a move. This
is not to say that selling at this point will not produce profits , but it
means that being late necess itates waiting with the trade, because one
is now working in the direction of the overall auction process, and
that information supplied from the market place needs to reaffirm its
strength . Sustained activit y from the seller requires that his immedia te
needs are satisfied. A seller still is with the major trend, but the activity
of the other timef rame buyer needs to be monitored closely. All other
time fram e buying to date has been responsive and the next day gives the
condition favorable to buying exposure, even though the aucti on is
presently in a down mode. While the value area illustrate s that the
market is not facilitating a great deal of trade, whenev er this initiating
activity occurs throughout the range, it is sufficient to enable free
exposure due to the fact that it has to go higher to shut it off. All the
buying activity was initiative, which provides enough activity for free
exposur e into the next day, wherein the market has to be monitored for
continuation of buying initiation or else the position has to be exited.
This is not to say that this situation is an attrac tive buying opport
unity. The point is, however, that if one seeks to buy, this is an attrac
tive place from the standpoint of minimizing " bad" exposure. Further, in
the auction process, whenever initiative activity occur s in all three
categories of range - especially with a confirming (wid er) value area, one
can assume risk-f ree exposure when going in the direction of the
initiation. The next day had higher values, but activity that was disconc
erting for buyers . It was a neutral day, and neutral days revert back
to the original initiative - the down auction. The next day - with higher
values and responsive selling activit y dominating the range - offered the
same opportunity of free selling exposur e to the seller, regardless of
when the position was enter ed. This was responsive activity in a down
auction. Responsive action in all three categories means that one should be
sure to be positioned with the major auction direction. In other words,
responsive activity in all three categories in an opposite type of auction
does not of fer free exposure. There is more activity at bottom than at
top. The other timef rame seller is more active here. As the examples end,
the market place is still

100 MARKETS AND MARKET LOGIC in a clear down auction. Buyers can sit
back and patiently await opport unities, selecting those which meet their
needs. They are not rushed, nor are they interested in creating
activity. Regar dless of an individ ual's trading or investing style, the
market , broken down into segments of prices transacted in time and
fonnulated into a bell curve, provides a set of circumstances available to
read. Reading and interpreting the market in this ma nner allows one to gain
an understand ing of how best to implement one's ideas and needs in the
market place.

ILL USTRAT I VE EXAMPLES 101 The following are actual profiles of

transactional data from Chic ago Board of Trade Soybean futures from July
15 through July 26, 1985. Note that underneath each profile, all the major
informa tion regarding 1) how the market is establishing value, and 2) the
activit y of the other timeframe buyers and sellers, is presented.

102 MARKETS AND MARKET LOGIC Soybeans Step 1 Trade % of Half H our
Bracket Times Price Volume Total CTIl% CTl2% At Which Prices Occurred
580 1/2 730 0.5 71.2 8.2 E 580 1/4 210 0.1 61.9 2.4 E 580 4160 2.9
41.6 10.1 E,F 579 3/4 1020 0.7 53.9 1.0 D ,E,F 579 1/2 8060 5.7 63.2
6.1 D,E,F 579 1/4 970 0.7 62.4 1.0 D,E,F 579 16880 11.9 57.9 16.6
D,E,F 578 3/4 2380 1.7 70.6 0.6 D,E,F 578 1/2 12720 9.0 64.4 8.9
D,E,F 578 1/4 2770 2.0 67.5 2.5 D,E,F,K 578 19800 14 .0 57.4 11. 5
D,E, F,G,H,J,K 577 3/4 5170 3.6 53.1 5.2 D,F,G,H,J,K 577 1/2 16050
11. 3 55.0 9.5 D,F,G,H, l,J,K 577 1/4 7380 5.2 67.9 6.1 D,F,G, H,l, J,K
577 15000 10.6 53.0 4.7 D,G,H, l,J,K 576 3/4 3600 2.5 58.1 2.8 D,H,
l,J,K 576 1/2 8870 6.3 61. 0 9.1 D,H, l,J,K 576 1/4 2750 1.9 65.3 1.3
D,H, l,J,K 576 10680 7.5 56.7 5.0 D,H, l,J 575 3/4 40 0.0 50.0 0.0 D,l
575 1/2 2160 1.5 57 .6 0.9 D 575 1/4 30 0.0 50.0 0.0 D 575 320 0.2
43.8 0.0 D 101750 71.8 58.5 9.2 D,E, F,G,H , I,J,K 70% Range 576 3/4 of
Daily to Volu me 579 % of Total CTIl CTI2 Total Volume for Nov 85
soybeans 141,750 58.4 8.3 Total Volume for Soybeans 220, 220 58.5 9.9
Total Spread Volume for Nov 85 Soybeans 3,280 54.9 1.8 7-15 Value area:
576 3/4-579 1) Buying at bottom, sell ing at top 2) No range extension
beyond first hour Responsive 3) TPO count indicates very slig ht sell ing

ILL USTRATIVE EXAMPLES 103 Trade Price % of volume Total CTI1% CTI2%
Half Hour Bracket Times At Which Prices Occurred 577 1/2 577 1/4 577
576 3/4 576 1/2 576 1/4 576 575 3/4 575 1/2 575 1/4 575 574 3/4 574
1/2 574 1/4 574 573 3/4 573 1/ 2 573 1/ 4 573 572 3/4 572 1/2 572
1/4 572 571 3/4 571 1/2 571 1/4 571 570 3/4 570 1/ 2 570 1/4 570
569 3/4 569 1/2 569 1/4 569 568 3/4 568 1/2 568 1/4 568 567 3/4 567
1/2 567 1/ 4 567 566 3/4 566 1/2 566 1/4 566 565 3/4 565 1/2 565
1/4 565 564 3/4 564 1/2 564 1/4 564 563 3/4 563 1/2 %Range Daily
Volume 10 180 33 40 400 3950 2310 6240 1670 5650 2330 10030 1870 2400
400 4580 3430 6170 33 80 4730 1830 1000 540 2370 980 2050 1040 3960
890 1700 920 2720 120 2720 1600 8530 3230 8740 4510 26670 71 40 13790
4320 14900 1850 5190 1020 5470 870 2110 1760 2320 290 2150 610 3490
60 120 148 ,1 30 564 to 573 0.0 50 .0 0.1 72 .2 1.6 57 .3 0.2 55 .0
1.9 55 .4 1.1 75 .8 3.0 74 .0 0.8 67 .1 2.7 75 .6 1.1 68 .2 4.9 70 .0
0.9 65 .0 1.2 65 .4 0.2 48 .8 2.2 55 .3 1.7 62 .2 3.0 68 .2 1.6 65 .1
2.3 42.8 0.9 70 .2 0.5 62 .0 0.3 32.4 1.1 41.6 0.5 56 .6 1.0 65 .9
0.5 64 .4 1.9 55 .4 0.4 57 .9 0.8 49 .7 0.4 37.5 1.3 64 .3 0.1 50 .0
1.3 59 .7 0.8 58 .1 4.1 63 .4 1. 6 69 .5 4.2 61 .2 2.2 63 .7 12 .9 58
.2 3.5 69 .5 6.7 66 .4 2.1 69 .9 7.2 54 .9 0.9 68 .6 2.5 53 .6 0.5 56
.9 2.6 52 .7 0.4 60 .3 1.0 55 .5 0.9 59 .9 1.1 52 .8 0.1 58 .6 1.0 67
.7 0.3 68 .0 1. 7 55.4 0.0 50 .0 0.1 33 .3 71.7 59 .5 Total Volume
For Nov 85 Soybeans Total Volume for Soybeans 0.0 5.6 3.1 0.0 3.8 2.4
7.8 0.6 4.1 3.9 4.2 16 .8 0.0 2.5 5.1 1. 5 9.4 2.4 5.0 3.6 0.0 9.3
7.2 2.6 3.9 2.9 11 .5 5.1 3.5 3.3 7.7 0.0 2.8 9.4 10 .6 3.4 10 .1
5.1 4.5 5.7 2.8 2.0 9.1 4.6 3.2 1.5 4.4 0.0 8.3 2.6 9.1 3.4 2.8 5.7
13 .2 0.0 0.0 5.9 Total Spread Volume for Nov 85 Soybeans 206 . 650
314, 090 11, 390 7-16 Value area: 564-573 D D D D D D D D D D D D
D D D,E D,E D,E D,E D,E E E E E E E E E E E E E E E,K E,G,K
E,F,G,H,K E,F,G,H, K E,F,G,H, I,K E,F,G,H,I,K E,F,G,H,I,J,K E,F,G,H,I, J,K
E,F,G,H, I,J,K E,F,G,H, I,J,K E,F,G,H, I,J,K E,G,I,J E,G,I, J E,G ,J, E,J J
J J J J J J J J J D,E,F ,G,H,I,J,K % of Total CTIl C TI 2 61. 5
60.7 52 .2 5.6 7.3 4.0 Init iati ve 1) Sell ing at top, buying at
bottom Init iative 2) Down side range extension 3) TPO count indicates
even buying and sell ing

104 MARKETS AND MARKET LOGIC Trade Price 573 572 3/4 572 1/2 572 1/4
572 571 3/4 571 1/2 571 1/4 571 570 3/4 570 1/2 570 1/4 570 569 3/4
569 1/2 569 1/4 569 568 3/4 568 1/2 568 1/4 568 567 3/4 567 1/2 567
1/4 567 566 3/4 566 1/2 566 1/4 566 565 3/4 565 1/2 565 1/4 565 564
3/4 564 1/2 564 1/4 564 563 3/4 563 1/2 563 1/4 563 562 3/4 562 1/2
562 1/4 562 561 3/4 561 1/2 561 1/4 561 560 3/4 560 1/2 70 % Range
of Daily Volume % of Volume 1540 950 6630 930 2940 880 1750 270 2240
2710 6550 1170 9300 180 460 20 590 10150 2400 710 6510 3330 10930
4750 10640 2840 6680 4300 9460 5290 11160 3180 10820 3300 6820 3220
11150 4420 3760 2250 9420 1740 6780 1720 6040 1500 2990 540 2790 350
960 150510 562 to 568 Total CTIl% 0.7 59.1 0.4 94.2 3.1 38.2 0.4 93.5
1.4 60.2 0.4 50.6 0.8 60.6 0.1 74.1 1.1 79.7 1.3 67.2 3.1 51.8 0.6
80.3 4.4 75.4 0.1 61.1 0.2 76.1 0.0 50.0 0.3 55.9 4.8 0.6 1.1 69 .8
0.3 56.3 3.1 54 .6 1.6 57 .5 5.2 63.5 2.2 68.1 5.0 64.2 1.3 72.7 3.2
56.7 2.0 65.2 4.5 62.6 2.5 68 .5 5.3 56.6 1.5 59.9 5.1 61.3 1.6 68.5
3.2 76.2 1.5 73.1 5.3 65.2 2.1 70.8 1. 8 58.2 1.1 57.6 4.4 57.7 0.8
65.5 3.2 55.3 0.8 59.6 2.8 55.5 0.7 61.0 1.4 54 .6 0.3 66.7 1.3 50.4
0.2 61.4 0.5 30.7 71.0 62 .4 Total Volume for Nov 85 Soybeans Total
Volume for Soybeans CTI2% 4.9 0.0 5.6 5.9 11.1 21. 6 11. 7 9.3 4.9 3.1
1.5 0.0 9.7 0.0 4.3 0.0 8.5 44.4 1.0 7.0 19.4 11. 4 7.2 8.1 10.6 2.1
3.1 5.0 9.6 1.9 7.3 3.6 15.9 2.1 2.3 1.1 5.8 5.8 6.6 5.1 3.1 0.6
2.9 3.5 5.8 6.0 20.6 1.9 7.0 5.7 20.3 7.0 Total Spread Volume for Nov
85 Soybeans 212, 010 320, 870 15 , 255 7-17 Value area 562-56 8 Half Hour
Bracket Times At Which Prices Occurred D D D D D D D D D D D D D
D D D D,E D,E D,E D,E D,E,K D,E,K D,E,F,J,K D,E,F,J,K D,E,F,J,K
D,E,F,J,K D,E,F,J,K D,E,F,J,K D ,E,F ,J,K D,E,F,H,J,K D,E, F,H,J,K F,H,I,J,K
F,H,J,K F,H, I,J,K F,H, I,J,K F,G,H,I,J F,G,H,I,J F,G,H,I,J F,G,H,I,J F,G,
I,J F,G, I,J F,G, I,J F,I,J F,I,J F,I,J F,I,J F,I,J I,J I,J I I
D ,E,F ,G,H,I,J,K % of Total CTI l CTI2 59.1 58.8 78.3 8.8 9.8 9.0 1)
Sell ing at top (initiatin g) , buying at bottom (responsive) Initiative
2) Down side range exte nsion Responsive 3) TPO count indicates buying

I LLUS TRATIVE EXAMPLES Trade Price 565 1/2 565 1/4 565 564 3/4 564 1/2
564 1/4 564 563 3/4 563 1/2 563 1/4 563 562 3/4 562 1/2 562 1/4 562
561 3/4 561 1/2 561 1/4 561 560 3/4 560 1/2 560 1/4 560 559 3/4 559
1/2 559 1/4 559 558 3/4 558 1/2 558 1/4 558 557 3/4 557 1/2 557 1/4
557 70 % Range of Daily Volume % of Volu me 1510 70 3820 590 2880
800 5270 3260 5140 1150 9490 1510 13650 2700 17210 4740 13080 3840
15750 3930 10970 1690 6170 1660 3600 1420 10200 1720 7310 2710 8790
140 2860 240 1240 121210 559 3/4 to 564 Total CTIl% 0.9 0.0 2.2 0.3
1.7 0.5 3.1 1.9 3.0 0.7 5.5 0.9 8.0 1.6 10.1 2.8 7.6 2.2 9.2 2.3
6.4 1.0 3.6 1.0 2.1 0.8 6.0 1.0 4.3 1.6 5.1 0.1 1.7 0.1 0.7 70.8
56.0 85.7 58.9 55.9 66.3 70.0 70.1 52.1 51. 6 67.0 55.7 61. 3 41. 7
66.3 59.1 63 .3 66.1 66.9 61. 0 66.9 60.4 67.5 61. 8 65.7 61. 3 57 .7
58.5 59.3 58.9 53.9 59.3 57.1 60.8 43.8 25.8 59.2 Total Volu me for
Nov 85 Soybeans Total Volume for Soybeans CTI2% 0.0 0.0 13.0 0.8 2.4
0.0 6.8 28.2 14.0 0.4 10.4 1.7 21.0 3.7 7.1 5.1 8.8 2.5 7.0 2.5 9.1
2.4 14.7 3.3 8.5 20.4 16.5 22.7 10.0 11. 8 17.2 0.0 6.1 27.1 25.8 9.8
Total Spread Volume for Nov 85 Soybeans 171110 247970 8715 7-18 Value
area 559 3/4-564 105 Half Hour Bracket Times At Which Prices Occurred D
D D D D D D D,J D,J D,J D,J D,J D,E,H, I,J,K D,E,H, I,J,K
D,E,F,G,H ,I,K D,E,F ,G,H,I, K D,E,F,G,H, I,K D,E,F ,G,H, I,K D,E, F,G,H, I,K
D,E, F,G,H , I, K D,E,F,G,H ,I, K E.G,H , I E,G,H , I E,G,H E,G,H E,G,H
E,G,H E,G,H E,G,H E,H E,H E E E E D,E,F,G ,H,I,J,K % of Total CTIl
CTI2 59 .0 57 .6 54.8 10.7 11.3 23.6 Responsive 1) Sell ing at top,
buying at bottom 2) No range extension Responsive 3) TPO count indicates
buying

106 MARKETS AND MARKET LOGIC Trade Price 555 3/4 555 1/2 555 1/4 555
554 3/4 554 1/2 554 1/4 554 553 3/4 553 1/2 553 1/4 553 552 3/4 552
1/2 552 1/4 552 551 3/4 551 1/2 551 1/4 551 550 3/4 550 1/2 70%
Range of Daily Volu me % of Volume 380 2010 510 3950 710 3670 2690
1063 0 3840 12610 6990 30120 3950 14520 4820 16500 2480 4800 2690 10650
1520 1340 103980 552 to 554 Total CTIl% 0.3 1.4 0.4 2.8 0.5 2.6 1.9
7.5 2.7 8.9 4.9 21.3 2.8 10.3 3.4 11. 7 1.8 3.4 1.9 7.5 1.1 0.9 55.3
56.7 66.7 63.9 62.0 65.7 76.4 58.6 73.6 60.5 64.1 51.1 62.7 53.7 65.2
52.5 69.2 49.4 51.9 47.3 75.3 60.8 73.5 56.4 Total Volu me for Nov 85
Soybeans Total Volu me for Soybeans CTI2% 3.9 23.9 1.0 10.4 2.8 4.8 6.5
9.0 6.5 9.0 12.2 16.3 8.1 11.6 1.8 6.5 3.6 3.6 0.7 16.9 3.9 12.7
10.8 Total Spread Volume for Nov 85 Soybeans 141380 222910 10800 7-19
Value area 552-554 Half Hour Bracket Times At Which Prices Occurred E E
E D,E D,E D,E, F D,E, F D,E,F,G,H D,E,F,G,H D,E,F,G,H,K D,E,F,G,H, I,K
D,E,F,G ,H,I,K D,F,H, I,J,K D,F,I,J,K D,F,I,J,K D,I,J,K D,J,K D,J,K D,J,K
D,J,K J J D,E,F,G,H,I ,J,K % of Total CTII CTI2 56.8 56.1 43.5 10.5
10.1 14.5 1) Sell ing on top , (initiative) , buying at bottom
(responsive) Init iative 2) Downside range extension 3) TPO count
indicates even buying and sell ing

ILL USTRAT IVE EXAMPLES 107 Trade % of Half Hour Bracket Times Price
Volume Total CTIl% CTI2% At Which Prices Occurred 556 3/4 390 0.3 51. 3
23.1 K 556 1/2 1730 1.2 54 .6 0.6 J,K 556 1/4 930 0.7 63.4 0.0 J,K
556 3150 2.3 64 .1 6.S J,K 555 3/4 1520 1.1 6S.S 2.6 J,K 555 1/2
2720 2.0 7S.1 2.0 J,K 555 1/4 1290 0.9 64.7 0.0 H,J,K 555 3330 2.4
5S.1 9.S H,J,K 554 3/4 1650 1.2 62.4 7.3 H,J,K 554 1/2 3040 2.2 67.1
4.9 H,J,K 554 1/4 lSS0 1.4 5S.S 9.S G,H,J,K 554 S060 5.S 66.4 9.2
G,H, I,J,K 553 3/4 5200 3.7 77.6 1.2 F,G,H, I,J,K 553 1/2 73S0 5.3 67.5
6.4 E,F,G ,H,I,J,K 553 1/4 3150 2.3 75.7 3.0 E,F,G,H, I,J 553 7060 5.1
73.1 3.4 E,F,G,H, I,J 552 3/4 4950 3.6 66.5 3.0 E,F,G,H, I,J 552 1/2
6070 4.4 61.7 5.5 D,E,F,G,H, I,J 552 1/4 3220 2.3 69.7 6.4 D,E,F,G,H,
I,J 552 9090 6.5 5S.9 11.9 D,E,F,G, I,J 551 3/4 1650 1.2 65.S 0.3 D,E,
F,I, J 551 1/2 4520 3.3 54 .9 17.3 D,E, I,J 551 1/4 960 0.7 53.6 1.0
D,E, I,J 551 5220 3.S 67.5 5.3 D,E,J 550 3/4- 3920 2.S 6S.2 5.9 D,E,J
550 1/2 5950 4.3 63.4 5.5 D,E,J 550 1/4 3110 2.2 73.2 3.1 D,E 550
24120 17.4 52.S 9.8 D,E 549 3/4 3260 2.3 71. 3 2.0 D,E 549 1/2 5960
4.3 71.S 3.4 D 549 1/4 1690 1.2 60.4 6.2 D 549 2760 2.0 49.S 7.6 D
54S 3/4 SO 0.1 56.3 0.0 D 70% Range 549 1/2 of Dail y to Volu me 553
1/2 % of Total 7-22 Value area 549 1/2-553 1/2 Responsive 1) Buying at
bottom Initia tive 2) Upside range extension Responsive 3) TPO indicates
sell ing

108 MARKETS AND MARKET LOGIC Trade % of Half Hour Bracket Times Price
Volume Total CTIl% CTI2% At Which Prices Occurred 558 1/2 110 0.1 100.0
0.0 D 558 1/4 30 0.0 50.0 0.0 P 558 5000 2.5 57 .1 7.8 D 557 3/4
700 0.4 70.7 5.7 D 557 1/2 4620 2.3 63.2 3.5 D 557 1/4 740 0.4 61.
5 13 .5 D 557 9640 4.9 57 .7 4.8 D,E 556 3/4 1870 0.9 66.0 5.3 D,E
556 1/2 4850 2.4 72.0 1.3 D,E 556 1/4 2810 1.4 66.5 6.2 O,E,F 556
13730 6.9 61.2 14 .7 D,E,F 555 3/4 3250 1.6 71. 7 2.8 D,E,F 555 1/2
5220 2.6 51.1 6.8 P,E,F 555 1/4 3290 1.7 71. 8 1.1 D,E,F ,G 555 6950
3.5 66.2 8.6 D,E,F,G 554 3/4 1490 0.8 57 .0 4.7 D,F ,G 554 1/2 3870
2.0 64 .6 1.3 D,F,G 554 1/4 1720 0.9 69 .2 6.4 D,G 554 4920 2.5 64 .0
11. 9 D,G 553 3/4 730 0.4 43.2 30.1 D,G 553 1/2 1910 1.0 41. 4 1.3
G,H 553 1/4 1100 0.6 55.9 1.8 G,H 553 4050 2.0 51.4 4.7 G,H 552 3/4
3130 1.6 62 .6 4.5 G,H 552 1/2 4740 2.4 58 .5 5.1 G,H 552 1/4 2070
1.0 66.9 11.1 G,H, I 552 4870 2.5 50.7 6.9 G,H, I 551 3/4 1050 0.5
74 .8 2.9 G,H, I 551 1/2 2390 1.7 59 .6 8.1 H,I 551 1/4 1250 0.6
54 .4 7.2 H,I 551 4340 2.2 60.0 5.1 H,I 550 3/4 970 0.5 72.7 0.0 H,I
550 1/2 1110 0.6 36.5 9.0 H,I 550 1/4 1410 0.7 52.5 5.0 I 550 7050
3.6 51. 6 4.5 I 549 3/4 530 0.3 38.7 1.9 I 549 1/2 310 0.2 75.8 0.0
I 549 1/4 110 0.1 50.0 22.7 I 549 1250 0.6 58 .8 2.8 I,3 548 3/4
1700 0.9 50.0 13 .5 I,3 548 1/2 3680 1.9 55.3 11. 7 I,3 548 1/4 1970
1.0 62.9 3.6 I,3 548 6040 3.5 55.2 12 .3 I,3 547 3/4 2430 1.2 62.1
9.3 I,3 547 1/2 3090 1.6 65.4 0.3 I, 3 547 1/4 1960 1.0 63.5 3.1 I,3
547 5480 2.8 58 .9 15 .0 3 546 3/4 1600 0.8 68.8 5.6 3 546 1/2 2240
1.1 58 .3 17 .2 3 546 1/4 1410 0.7 61. 7 6.0 3 546 2960 1.5 46.6
25.8 3,K 545 3/4 1270 0.6 74. a 4.3 3,K 545 1/2 3930 2.0 49.6 18 .4
3,K 545 1/4 1740 0.9 69 .3 2.9 3,K 545 6690 3.4 49.6 17.4 K 544 3/4
540 0.3 57 .4 0.9 K 544 1/2 1040 0.5 53.4 0.0 K 544 1/4 270 0.1
38.9 0.0 K 544 2010 1.0 46.0 16.9 K 543 3/4 450 0.2 53.3 0.0 K 543
1/2 1880 0.9 53.2 0.0 K 543 1/4 20 0.0 25.0 0.0 K 543 3570 1.8
58 .3 14.8 K 542 3/4 110 0.1 63.6 0.0 K 542 1/2 1790 0.9 65.4 1.4 K
542 1/4 NA 542 4260 2.2 48.1 14.0 K 541 3/4 30 0.0 16.7 0.0 K 541
1/2 2460 1.2 56.7 13.0 K 541 1/4 510 0.3 65 .7 18.6 K 541 7590 3.8
52.6 8.1 K 540 3/4 130 0.1 92.3 0.0 K 540 1/2 1700 0.9 63.2 8.2 K
540 1/4 40 0.0 50.0 0.0 K 540 510 0.3 50.0 0.0 K 139740 70.6 59.8
7.0 D,E,F,G, H,I,J 70% Range 547 1/2 of Daily to volume 558 % of Total
CTII CTI2 Total Volume for Nov 85 Soybeans 198070 58 .5 8.4 Total
Volume for Soybeans 284560 58 .5 7.8 Total Spread Volume for Nov 85
Soybeans 11140 53 .9 7.1 7-23 Value area 547 1/2-558 Responsive 1)
Selling at top to Initia tive) Init iative 2) Downside range extension
(Responsive Initiative 3) TPO count indicates selling

ILL USTRATIVE EXAMPLES 109 Trade % of Half Hour Bracket Times Price
Volume Total CTIl% CTI2% At Which Prices Occurred 543 1/2 2640 1.5 56.1
8.5 D,E 543 1/4 1080 0.6 61. 6 0.9 D,E 543 5240 2.9 63.5 12 .6 D.E
542 3/4 3830 2.1 67.6 7.8 D,E 542 1/2 7830 4.3 55.6 10.5 D,E 542 1/4
2050 1.1 68.8 5.1 D,E 542 13710 7.6 59.7 12.2 D,E,F 541 3/4 6090 3.4
67.7 8.3 D,E,F 541 1/2 6240 3.5 66.7 9.8 D,E,F 541 1/4 720 0.4 82.6
2.8 D,F 541 5770 3.2 52.4 23.5 D,F 540 3/4 750 0.4 57.3 9.3 D,F 540
1/2 2820 1.6 58.9 5.1 D,F 540 1/4 1450 0.8 64.5 0.7 D,F 540 2370 0
13 .2 61.7 11. 7 D,F,G 539 3/4 750 0.4 71.3 1.3 D.F,G,H 539 1/2 4710
2.6 56.8 12 .1 D,F,G,H 539 1/4 2570 1.4 70.0 4.5 F,G,H,I 539 9680 5.4
52.5 17.7 F,G,H, I 538 3/4 6830 3.8 60.7 12 .4 F,G,H , I 538 1/2 4800
2.7 63.1 7.7 F,G,H, I,J,K 538 1/4 5410 3.0 64.3 4.3 F,G,H, I,J,K 538
15180 8.4 55.3 10.2 F,G,I,J,K 537 3/4 4020 2.2 68.5 5.8 F,G, I,J,K 537
1/2 8400 4.7 58.3 9.4 F,I,J,K 537 1/4 3860 2.1 63.7 6.1 F,I,J,K 537
12120 6.7 53.3 10.1 I,J,K 536 3/4 4500 2.5 76.6 3.0 I,J,K 536 1/2
6530 3.6 55.5 8.3 I,J,K 536 1/4 2100 1.2 63.3 7.1 I,J,K 536 3770 2.1
59.4 14.3 I,J,K 535 3/4 180 0.1 61.1 2.8 K 535 1/2 870 0.5 16.1 0.0
K 129720 72.0 59 .4 10.5 D,F,G,H,I,J,K 70% Range 536 of Daily to Volu me
541 % of Total CTIl CTI2 Total Volume for Nov 85 Soybeans 180200 60.0
10.3 Total Volume for Soybeans 270180 59.3 9.5 Total Spread Volume for
Nov 85 Soybeans 11220 46.3 24.5 7-24 Value area 536-541 1) Buying on
Bottom Initia tive 2) Downside range extension Initi ative 3) TPO count
indicates sell ing

110 MARKETS AND MARKET LOGIC Trade Price 541 3/4 541 1/2 541 1/4 541
540 3/4 540 1/2 540 1/4 540 539 3/4 539 1/2 539 1/4 539 538 3/4 538
1/2 538 1/4 538 537 3/4 537 1/2 537 1/4 537 536 3/4 536 1/2 536 1/4
536 535 3/4 535 1/2 535 1/4 535 534 3/4 534 1/2 70% Range of Daily
Volume % of Volume 60 2870 1480 4940 2500 7290 4060 14260 4760 13000
5770 12290 1880 4710 2870 21910 4410 9020 2680 8300 1880 4540 200 8980
680 1740 1240 2630 710 230 109920 537 to 540 1/4 Total CTIl% 0.0 1.9
1.0 3.3 1.6 4.8 2.7 9.4 3.1 8.6 3.8 8.1 1.2 3.1 1.9 14.4 2.9 5.9
1.8 5.5 1.2 3.0 0.1 5.9 0.4 1.1 0.8 1.7 0.5 0.2 72 .4 25.0 61.8 67.9
70.4 69.4 65.6 69.6 64.0 73.3 64 .9 78 .9 61.4 66.5 72.7 74.4 73.9
82.9 70.6 74.1 69 .8 60.4 50.3 47.5 41. 6 55.1 62.9 73.0 58.7 24.6
41.3 69.8 Total Volu me for Nov 85 soybeans Total Volu me for Soybeans
CTI2% 16.7 8.2 0.7 7.2 5.6 2.2 1.5 11. 7 5.0 5.8 4.8 9.8 4.5 12.4
2.1 3.8 5.6 3.9 5.8 8.0 1.9 2.8 0.0 19.5 15.4 7.5 0.4 2.1 28.2 0.0
6.5 Total Spread Volu me for Nov 85 Soybeans 151890 231140 9030 7-25
Value area :537-540 1/4 Init iative 1) Buying at bottom Half Hour Bracket
Times At Which Prices Occurred G F,G,H F,G,H , I F,G,H , I,K F,G,H , I,K
F,G,H, I,J,K F,G,H, I,J,K D,F,G,H, I,J,K D,F,G,H, I,J,K D,F,G ,H,I,J,K
D,F,G ,H, I,J,K D,E,F,G , H,I,J,K D,E,F,G,H ,J D,E,F ,G,H,J D,E,F D,E,F D,E,F
D,E,F D,E,F D,E D,E D,E D D o o o D o o D,E,F,G,H, I,J,K % of Total
CTII CTI2 66.5 62.5 45.2 6.9 9.9 23.3 Initia tive 2) Upside range exte
nsion Responsive 3) TPO count indicates sell ing

ILL USTRATIVE EXAMPLES 111 Trade % of Half Hour Bracket Times Price
Volume Total CTIl% CTI2% At Which Prices Occurred 545 1000 0.8 21. 0
10.5 I 544 3/4 390 0.3 74.4 1.3 I 544 1/2 2290 1.7 55.7 8.7 I, J
544 1/4 3260 2.5 56.3 14.9 I,J 544 7190 5.4 58.1 9.9 I,J 543 3/4
3340 2.5 75.1 11.8 I,J 543 1/2 4020 3.0 53.5 17.7 I,J 543 1/4 1810
1.4 60.5 0.8 I,J 543 5510 4.2 62.7 8.4 I,J,K 542 3/4 2400 1.8 66.9
6.5 I,J,K 542 1/2 4720 3.6 57.1 10.8 I,J,K 542 1/4 650 0.5 76.9 1.5
I,J,K 542 3830 2.9 42.6 24.2 D,E,H, I,K 541 3/4 2790 2.1 68.3 3.0
D,E,H, I,K 541 1/2 4560 3.4 66.2 6.6 D,E,H, I,K 541 1/4 2110 1.6 61.8
5.0 D,E,F,H, I,K 541 6020 4.5 63.5 16.0 D,E,F,G,H,K 540 3/4 5000 3.8
64.4 5.8 D,E,F,G ,H,K 540 1/2 5300 4.0 61. 0 7.0 D,E,F,G,H,K 540 1/4
3920 3.0 71.0 1.7 D,E,G,H,K 540 14340 10.8 64.7 8.4 D,E,G,H,K 539 3/4
2300 1.7 63.3 8.3 D,G,H,K 539 1/2 7040 5.3 62 .5 1.8 D,H,K 539 1/4
3340 2.5 66.6 3.1 D,H,K 539 10330 7.8 68.7 6.3 D,K 538 3/4 930 0.7
71. 5 4.3 D, K 538 1/3 . 4700 3.6 63.5 11. 2 D,K 538 1/4 430 0.3
55.8 7.0 D,K 538 5010 3.8 51.9 13.2 K 537 3/4 420 0.3 75.0 0.0 K
537 1/2 2310 1.7 55.4 13.2 K 537 1/4 150 0.1 60.0 0.0 K 537 3310
2.5 49.2 11.8 K 536 3/4 290 0.2 82.8 0.0 K 536 1/2 4800 3.6 46.7
11. 0 K 536 1/4 350 0.3 82.9 0.0 K 536 2170 1.6 59 .4 12.9 K 95230
72.0 63.1 8.2 D,E, F,G,H , I,J,K 70% Range 538 of Daily to Volume 543 %
of Total CTIl CTI2 Total Volume for Nov 85 Soybeans 132330 61.2 9.0
Total Volume for Soybeans 191370 59.9 9.8 Total spread Volume for Nov
85 Soybeans 9365 62.3 6.8 7-26 Value area : 538-543 1) Sell ing at top
Initia tive 2) Upside range exten sion Responsive 3) TPO count indicates
sell ing

112 MARKETS AND MARKET LOGIC Step 2 - Running Com mentary This running
comm entary on soybeans will interpret how the market is establishing value
and what the level of activity of the other timeframe buyers and
sellers reveals about the market. On the first day, the soybean market is
neutral , indica ting very little activity of other timeframe traders. This
shows day timeframe traders eliciting a fair price area so that trade can
take place. Once that area is foun d, the market will remain there unless
influenced by the entrance of the other time frame trader, the participant
who has the ability to change a market 's structure. Note that the value
area has a narrow range . This narrowness indica tes that this area was
not facilita ting trade. Thus, the market cannot stay in this condition for
long, and one should note that any activity changing the market should be
classified as initia ting activity. Early in the second day, trade begins
at about the same level of the first day's value area. Once below this
area, the market moves lower quickly. Other timef rame sellers are active
at the top of the range, and cause range extension to the downside. The
time-price opportunity (TPO) count is even, indica ting that other timef rame
buying and selling was even in the value area. Other timef rame buying
occur red at the bottom of the range in response to the opport unity.
The TPO count being even, after the initial wave of selling, day timef rame
traders had to find support in the mmxet in order to have two-sided
trade. The sharp market movement went low enough to first stop the
impetus of selling and in fact found some responsive buying that served as
early support, and later was equalized when the selling returned. The wide
range in value area shows that the market was facilitating trade, and
that selling definitely was the initiating activity. Selling was expected
to be slowed but has not ended. On the third day, the market had slightly
lower to unchanged values. Selling activit y was indic ated at the top of the
range in response to the higher prices. Further, range extension to the
downside was initia ting activity. The TPO count indica ted responsive
buying by the other timef rame buyer in the value area and again at the
bottom of the range. Note that other timef rame sellers stayed in an
initiating mode with buyers only in a responding mode. The fourth day,
lower values follow with responsive buying at the bottom. The TPO count
indica tes buying in the value area, but with responsive selling above the
previous day's value area. Note that there is no range extension, so that
initiating action is absent on this day, but the down auction remains.
Other timef rame traders wish to become responsive seller s rather than
initiating sellers. Given an opportunity , sellers will still be appar
ent. On the fifth day, the market opened sharply lower due to a domina nt

IL LU STRATIVE EXAMPLES 113 concern over some weather or news relate d

influence. The market showed some initia ting selling at the top of the
range, a range extension to the downside that failed, and a TPO count in
the value area was even. The value area was extremely narrow, illustrating
that the market was not facilitating trade at this new level, and that the
sharp price break had brought about some - but little - activity from the
other timef rame seller. The failure to extend the range gives the day
timef rame traders - as well as other time fram e buyers - confidence to
begin some buying activity. In other words, the other timeframe buyer
needs to surface in order for the market to read his activity and the fact
that he did not show much activity is an indica tion of his passivit y.
Thus, the market is coming down to lower levels, thereby offering m ore
attractive opportunities for the other timeframe buyer. Yet he is not at this
time taking advantage of them, and we can assume he will not unless
forced to change. Sellers, on the other hand, having temporari ly removed
their anxiety, at present want to take advantage or respond to market-
created opportunities. During the sixth day, there was an attem pt to initi
ate buying activity when the market opened below the previous day's value
area, and then went back up through these values as other timef rame
buyers respo nded to the early low prices. Their level of activity was high;
they initiated by extending the range upward. This was their first
initiating activity in the sample, and was met with the expected selling by
other timef rame traders in response to the opportunity . Note that the lack
of early selling brought about buying which in turn continued until the
selling response was found. The seventh day sees the other timef rame
seller s respond to a market-created opportunity by selling aggressively
at the top of the range . They are initia ting activity in the value
area causing range extension, and dominating activity in the value area,
producing net TPO selling as indica ted in the count. That other timeframe
seller s are still present and dominant at lower price levels indicates
that the down auction is still intact, since trade is being facilitated
the lower the market moves. On the eighth day, downside range extension
shows seller s initiating activity, and the TPO count also indic ates net
selling. The extr emes, however, showed no other timef rame activity. The
narrow value areas show that volume is being handled by the day timef rame
trader and that the other timef rame trader is not very active. On the
ninth day, the market has relatively unchanged values, with initiating buying
at the bottom and range extension to the upside that is met with responsive
TPO selling. On the last day of the sample, the market shows initial initia
ting buying at the bottom of the range (remove the G through K against
D period) and a range extension to the upside with relatively unchanged
values and TPO selling in

114 MARKETS AND MARKET LOGIC respo nse. There also was responsive selling
at the top of the range in response to range extension by the initia ting
other timef rame buyers. The buying then becomes passive, as selling
initiated a further range extension to the downside late in the day.
Usually a double range extension indica tes that the day will be a
neutral day. Neutral days revert to the original auction direction. This is
an example of a split day or a day split into two parts. It points out
that while at the same prices other timef rame buyers and sellers fail to
come togethe r, they can use the same prices at different times during the
day. The whole sample shows a down auction with little aggressiveness on
the part of the other timef rame buyer. He really only surfaced respo
nsively or when he was the only other timeframe participant. The other
timeframe seller was being forced by this situation to continue his activity
throughout the range of our sample. He took advantage of the situation
offered as best he could and was by far the most aggressive in setting
the tone of the auction. His continued presence at this lower level means
that the market has not gone low enough to shut off the activity in this
large auction sequence. The down auction will continue so long as his
behavior and activity level continue. Step 3 - "Free Exposure" When an
individua l seeking free exposure uses the data as a decision support
tool, he can deduce as the second day unfolds that the market is in a down
auction. The value areas of the second day were never breach ed nor was
there an absence of other timef rame seller activity. He initia ted and
responded in far greater fashion than the other timefram e buyer. It needs
to be understood that the seller s do not like to follow and continuously sell
as the market goes lower, nor do buyers like to continually buy higher.
Thus, if this activit y is demonstrated you can deduce that this behavior
is being forced, rather than volun tary. Remember that the particip ants we
monitor are responding volun tarily or are being forced by their
circumstance. You can see that sharply changed prices do cause activity
to slow down, particular ly on the fifth day, the 19th. The buyers waited
until the lower prices on the sixth day, the 22nd, were rejected and the
values of the previous day were violated until they responded. This means
that the long -term buyer was given every opportunity to continue to
respond. Before he responded , he made sure that there was an absence of
other timef rame sellers before committing. In other words, the lack of
range extensio n (failed on the fifth day), the lack of selling in the TPO
area in the face of little buying, were information sources that motivated
the long timefram e buyer. The other timef rame buyer 's readings motiva ted
his activities. Although we attribute this as initiating activity, it was
in

ILL USTRATIVE EXAMPLES 115 actuality more of a forced respon se due to the
exhausted activity of the seller. With the initia ting and response
activity of the other timef rame seller, one could take a short position
in almost any instance except for the fifth day and early the sixth day. A
set of cir cumstances on the 19th and early 22nd (fifth, sixth) were the
only set of circumstance wherein one could launch a free exposur e long
position. Throughout this sample, values moved lower, and when selling
activity slowed, only unchanged values developed, i. e. , the other timef
rame buyers only accepted these lower values and never upset this balance
of the market. This is a clear down auction which will continue. The
activity levels in the last few days of this sample. As a point of
conclusion, when looking fo r a "free exposure" situat ion, look for
initiating activity throughout the range, whether in an up or down main
auction. Look for responsive action in all three cat egories when one is
with the major action direction. Logically, one is able to take this
position because in order to stop this activity, the market will have to
continue to move directionally in order to shut it off.

III. Practical Applications for the I nvestor-Trader

11 HOW BEST TO GET RESULTS T he vast majority of participa nts in exchange

marketp laces lose because they do not examine, ponder and try to improve
what can be termed their overall appro ach to the market. An approach would
be a framework encompassing all the variables which combine to collectively
spell either success or failure in a market place. In principle, an
individual seeking success in the automobile market would employ the same
appro ach as he would in the housing market, in futures, stocks, any market in
existence or vir tually any endeavor. Thus, defining and then examining
one's approach is as important a step for a marketing executive responsible
for pricing decisions as it is for a futures or stock trader. Yet very few
partic ipants have ever even defmed for themselves the equation for
investing and trading results which would specif y or enumerate all the key
components or variables which will account for their success or failure.
Thus, few participants have an organized framework from which to monitor
those variables, adjust for patterns, and begin improving their trading
results. The Equation for Results and the Two Possible Approa ches Our
equation for trading or investing results which enumerates the components of
one's overall approach given a specific opportunity is: Yo ur market
understanding x (you + your trading strategy) = results. Consideration of
this equation reveals two alternative market approaches : one assumes
randomness in market behavior and market

120 MARKETS AND MARKET LOGIC efficiency, and therefore does not see the
possibil ity of developing a market understanding, since the behavior of a
random object cannot be understood in terms of cause and effect. The second
approach assumes the market cannot be random but acts due to cause and effect,
and thus places great emphasis on developing an understanding of the market
and its conditions in order to isola te the motivating causes. The first
approach makes success much more difficult by relying on the strength of
the individual to overcome a lack of infor mation sufficient for logical
decision making. The second makes success more readily available for the
average person, since decision making relies on a sound market
understanding based on presently availa ble inf orma tion, thus reducing the
pressure on the individual to make decisions with confidence and poise
while uninf ormed. The first approach un knowingly forces the individual to
rely on his strength as an individual, and to act in ways and under
situations that few humans can. The second approach allows him to
capitalize on his personal decision making strengths while acknowledging
and minimizing his weak nesses. The first is the current appro ach embrac
ed by the academic community and the second is the logical approach advoc
ated by the authors in this book. G iven an identical (you + your
trading strategy) , the determinant for each individual 's success level
revolves around the difference in market understanding - the ability to
correctly read and interpret the market's up-to-the-min ute condition so as
to accurately deduce when exceptional trading oppo rtunity exists. Yet
because of their lack of aware ness of the principles espoused in this
book, a complete or near complete lack of market understanding is exactly
what most partici pants face. Given the above equation, consider the
rather drastic disa dvantage one faces when appro aching a market with no
(zero) market understanding. To overcome a lack of inform ation from which
to generate deci sions, most traders and investors resort to attem pting
to predict the market 's future direction, forfeiting a market
understanding. This appro ach to a market place unknowingly accepts a 50%
probability factor, since in a market of uncertainty any systematic
predictive appro ach is going to be right 50% of the time and wrong 50% of
the time, when applied consistently over a statistically large sample
size. When the average trader or investor begins by trying to forecast the
market's direction, he protects himself from his lack of market under standing
with a defensive trading strategy . Such a defen sive strategy includes
entering the market only with a predet ermined profit and (especially)
loss point, the latter being known in organized markets as a stop-loss
order. While for the average person, predicting might do lit tle better
than 50-50, when accompanied by the use of stops, the percentage of
positions based on predictions are going to be correct no
PR ACf ICAL APPLICATIONS 121 better than 50% of the time. Consider that on
any purchase there are but three possible outcomes over the imlTIediate
or short timef rame: 1. The market moves up. 2. The market doesn 't move
up but it doesn't break. 3. The market breaks. For example, the key to
success on a series of purchases (long position) is not only to have the
first outcome, but merely to avoid the third outcome. Most indivi duals
who lack a market understanding do not know why the second outcome is
acceptable, and under what conditions it is preferred. While defens ive,
the use of stop orders is not over the long term a succes sful or winning
strate gy. To illustrate why, assume that the buyer enters the market and
uses a "sell-stop " loss point which may on occasion be triggered by
outcome #2 and will be triggered by outcome #3. By employing the
defensive use of stops, he is thus willing to take either #1 or #3 ,
whichever comes first. He is not affected by the #2 outcome, since his
parameters are outside the conside ration of price standing still through
time. By using stops, the trader is thus willing to accept one event
happening before another in a market of uncertainty , a strategy which is
at most a 50-50 proposition over a large sample size. Over a large sample
size, the scenario #2 occurs regularly, and the individual who has a
market understanding and does not use price stop-loss points gains an
advantage of 1 % to 1 6 %, depending on the frequency of all three events.
If we can assume that each of the three scenarios occur s equally, then by
halting the use of a stop-loss, the participant with a market
understanding has a 66% chance of not losing any capital. Indeed, he has
the same percentage for success as the individual who predicts and uses
s.tops, but by improving his loss percentage - decreasing the percentage of
losing trades - he dramati cally improves his odds for success over the long
term. Thus, by discarding the stop-loss order strategy, one gains a
substan tial percentage advantage over the user of stop-loss orders.
Furthermore, logic dicta tes that using a stop-loss order predicated
solely on price param eters assumes that all prices have the same signif
icance, an assumption the participant with a market under standing knows
to be false. The market manages itself through time and promotes itself
through price, so the trader who manages his trading decisions solely on
price is out of step with market reality. Yet, users of stops often lose
in other ways. If the market moves in the desir ed direction, the
individual with a market understan ding, sensing the market 's strong
condition, may profit much more substan tially than the individual with a
predeterm ined and inflexible profit

122 MARKETS AND MARKET LOGIC point. And as the market moves against both,
the individual with the market understanding will monitor the market and
act accordingly. Understanding the condition of the mark et, he can be
comf ortable watching price move against him, secure in his knowledge that
the structure of the market never changes insta ntaneously and that he has
time to exit the position. He gets concerned only when the market 's
structure warrants . 5 In contrast, the trader who uses stop-loss orders
and profit objectives faces the dilemma of how much loss is accept able.
If the stop is placed too close, he may watch the market move against
him just far enough to hit his stop and then quickly rally back in his
direction without his participation. If the stop is placed too far, he will
not exit the trade prior to losing substantial capital. Thus, in a market
of uncertainty, an appro ach which is willing to take whichever comes first,
a profit or loss (in other words, one which does not manage for the current
situation), yields a 50% proba bility of success over a large sample size,
given no (zero) execution costs and a 100% effective "you" and "trading
strateg y. " The problem is that execution costs exist and that no human is
capable of 1 00% efficiency all the time; humans respond to unob jective,
illogical factors. So, if one were to allow for human frailty, and
assume a 70% "you effectiven ess, " the equation would yield only a 35%
proba bility of success. This simplis tic discussion should illustrate that
most average people have to overcome at least 15% deficiency in order to
break even (not to mention commissions) in an organized market. This is
not to say that success cannot be or has not been achieved on a consi stent
basis by predicting and without the benefits of a logical market
understanding. But it is rather unlikely for all but a very few traders to
regularly achieve successf ul results with such an appro ach. The vast
majority cannot be consi stently accurate forecasters. And their appro ach
keeps most traders and investors from developing a market understanding.
On the other hand, given the fact that a person should and can have a 100%
understanding of what is going on in the present tense - not that this high
level of understanding will always occur, but assuming the person will
limit his trades to times when it does - a 100% up-to-the-moment market
understa nding is possible. The resulting percentage of success when
allowing for the "you" will be dramati cally higher, and all other things
being equal , successf ul results will be more easily achieved. A 100%
understanding will not occur all the time, but a market understanding of
80% x 70% effective you = 56% results factor. This is a dramatic increase
in the odds for success when constant you and trading strategy is factored
in. The market under standing approach puts the individual in a much more
advantageous situation. It puts him in an environment in which a normal human
being can ask himself to function comf ortably , an envir onment which puts

PR ACfICAL APPLICATIONS 123 the percentages in his favor. Be fore continuing

to make a more in-depth comparison of the two market appro aches - no
market understa nding versus a market under standing - consider the first
appro ach, the current trading-investing appro ach, and its practical
application for investors and traders. The Current Approach to Trading The
current approach to trading does not rely on a sound, logical
understanding and approach to the market place, in sharp contrast to the
classical approach to investing espoused by Graham and Dodd in Secur
ities Analys is, which clearly does. In the eyes of some, such a blanket
statement may seem too strong, bordering on hyperbol e. However, this
statement is not so strong when one realizes that few market participa nts
who consider themselves traders actually under stand what it is they are
doing. In other words, with the current trading appro ach, there is often
a signif icant difference between what the trade r thinks he is doing, and
the reality of what he is actually doing. The current approach is such that
many who believe they are trading are in fact investing, and vice versa.
These statements may seem preposter ous in light of the fact that most market
participants are well educated, but problems exist because there are no
generally understood definitions of trading and investing which have a basis
in reality. 6 To begin to discuss the current state of trading,
definitions of investing and trading and hence the distinction between them
need to be underst ood, so that the illogical deductions which contribute
to misco nceptions can be pinpointed. Trading and Investing Trading and
investing are essentially identical. In both macro and micro sense, and in
both theory and reality, they operate logically, relying on the same
principles. Both have as goals the enhancement of capital with minimal
capital exposure. There is no distinction between the two from a risk
standpoint. Both may or may not involve leverage, and to differing degre
es, and since neither is relegated to a specific market, neither is
prima facie more or less risky than the other. In both sound investing and
sound trading, one seeks to enter a position where one is purchasing
below value or selling above it, managing this position through time. This
approach to investing was presente d in the work, Securities Analys is. In
it, Graham and Dodd assumed that the market was not efficient, and that
value and price in the securities markets are two distinct things. At times
the market will undervalue a security, and at other times it will
overvalue it. The work dealt with publicly held compani es, entities which
regu-

124 MARKETS AND MARKET LOGIC larly reported perfonnance infonnation in the
fonn of annual balance sheets which listed assets, income statements,
quarterly sales and earnings reports, and other infonnation which can be
translated into per share profits and value. Graham and Dodd analyzed this
infonnation outside the market place in order to evalua te the earnings
stream and asset value. They then comp ared their conclusions about the
com pany 's current value (taking into account such variables as risk-free
rate, etc.) to the current market price of the stock. They then could
ascertain if the organized market price was below, at or above their valua
tion. Any time a price is away from value, an opportunity exists. Graham
and Dodd 's approach holds as true in other markets as it does in the
securiti es marke ts: find something which is undervalued and buy it. Over
time, assuming conditions remain unchanged, it will reach fair value and
demand may increase to such an extent that it can be sold above value.
However, not all markets are as easily studied as the securities marke
ts. In other words, futures markets and virtually all markets outside
the realm of the equity world do not lend themselves to regular study of
outside infonnation which relates to either asset value or current
earnings power. However, the importance of ascertaining value in markets
which do not have an extensive infonnation flow is identical to those that
do. In other words , the job of dif ferentiating between price and value may
be more difficult in futures than in securities marke ts, yet its importance
for success for the investor /trader is identic al. While both trading and
investing have the same goal, they differ in two ways: the type of
infonnation used in the decis ion-making process and the management approach
employed. As you will see, the type of infonnation each focuses on
detennines their respective management appro aches. 7 Information Both
trader and investor use infonnation to generate decisions and both have a
sound basis for doing so. They differ in the type of infonnation they place
primary importance on when making a buy-sell decision. Investors place
prim ary importance on infonnation generated outside the market place:
balance sheet, income statemen ts, quarterly sales and earnings reports,
the potential demand for an emerging technology or new product, management,
favorable legislation, the overall invest ment and economic clima te, etc.
Investors relate this infonnation to the market place in assessing probable
change in value, either ignoring or placing as secondary in importance the
market-generated infonnation regard ing changes in market value. Traders also
seek and apply outside infonna tion, but they place primary importance on
infonnation generated by the market itself. This

PRA Cf ICAL APP LICATIONS 125 inf onnation is analyzed within the context
of specific opport unities, and the vast majority of trading decisions are
based on it, possi bly within a backdrop of infonnation outside the
market. Thus, the investor neither seeks infonnation on nor heavily
regards short-tenn market moves, while the trader seeks infonnation on
and heavily regards the short tenn and may utilize infonna tion generated
outside the market as a backdrop. This statement introduces the second
distinction between trading and investing. Management Both traders and
investors manage their decisio n-ma king process and hence their position
through or over time. But because of the type of infonna tion each
focuses on, each must employ a different manage ment approach. Managing a
trade differs from managing an investment in that in managing an investment
through time, one does not employ a "hands on, " near-tenn approach, but
is more passive, employing a long timef rame. (Either price rises above
value, or changes take place in cost or demand, or management changes
are effec ted, or any combination of these occurrences which increase the
value of the property take place.) In other words, when investing, as
defined in Graham and Dodd 's Security Analysis , actively monitoring the
market is not required. A person enters an investment because infonnation
outside the market (as opposed to market-generated infonnation) indica tes
an opportunity to buy price below value; the market is then expected to
"carry the day" and produce price at or above value results. The
position is held through time so that the opportunity can evolve and the
rest of the market participants can recognize the security 's value.
Meanwhile, the investor actively monitors the outside-the-m arket
infonnation as it is updated. So long as updates indic ate that the
undervalued situation is intact, the position is held. If updates of the
outside-the -market infonnation indicate that the under lying conditions are
changing, the position is reevaluated, and it is either kept and
reevaluated again, or exited. In contrast, managing a trade requires a more
"hands on, " active management approach than managing an investment, as
market generated infonnation is updated with the unfolding of every time
price opportunity. Just as the investor updates his assessment of the
investment with new infonnation, so does the trader. Thus, because of the
frequency of infonnation, the trader is by definition an active manager. He
tends to have a shorter timef rame, especially for tolerat ing a negative
perfonn ance, since he is made aware of a changing situation much sooner.
Thus, in trading, near-tenn management is essenti al, because the
opportunity is not necessa rily presumed to carry the day and changes in the
situation are quickly reflected in market-

126 MARKETS AND MARKET LOGIC generated infor mation. To fully clarify the
distinction, consider the management approach employed by the trader with
the shortest timeframe - the local scalper in a futures pit. The local
scalper seeks to enter the marketplace only to buy at the bid and/o r sell at
the offer. This "edge" he receives fo r making the trade provides a period
of time from which he can operate in a low-risk fashion under current
conditions. He does not initia te a position because of price being below
value, or monumental changes due to an emerging technology or increased
demand - occur rences which may take years to fully unfold. Thus, he does
not presume the situation will carry the day. Nor is the local 's
management approach one which relies on predictions. His management
approach involves his actively monitoring the market, buying at the bid and
selling at the offer, seeking only risk-f ree capital exposure and
monitoring the market forward for change. As he detects the slightest
market change, he reevalua tes his position. His goal was to be able to
offset the trade profitably as soon as possible within the timef rame the
edge allows him, or at least to be able to exit the trade at the same price
before the conditions change and fo rce him to take a loss. In other words,
he tries - for the majority of his trades - to either make a profit or break
even and not take one or a series of losses. His success rests on his
willingness to exit positions without waiting for the market to show him a
loss. The Concept of Free Exposure Because of his ability combined with the
frequency with which he may update his situational assessment, he is in the
best situation that can face an investor/trader. He "buys" what can be
termed "free expo sure" in the marketp lace: over a large sample size he
has the chance to make mone y without the risk of losing it. This is because
once he initia tes a trade, he has the luxury of a certain period of time
required to exit the trade without a loss, ifhe so desires. In this process,
he may be using as backgr ound some outside investment information that may
be available, but before making the trade and while holding the
position, he primarily relies on his sense of the ongoing condition of the
marketplace, garnered from market-generated information, to activate his
decisions. 8 Any successf ul trader approaches the marketplace from a
risk standpoint similar to that of the local: he wishes only to enter
those positions where he can enter the market, and either profit or
extract himself from his position, if he has any adverse assessment of
his situation, without facing a loss in capital. In other words, like the
local, he is willing to either take a profit or get out break ing even or
with a

PRACfrCAL APPLICATIONS 127 small loss, avoiding a large loss. But his
approach does not include a willingness to " take a profit or loss,
whichever comes first. " He tries - through management - to gain free
exposure. In other words, he is not trying to predict the future, but merely
to understand what is going on in the present and have either a break-even
or profitable situation to take advantage of. The investor, on the other
hand, also seeks a period of free exposure. He hopes that the undervalued
opportunity that he detects in the marketplace - which is based on inf
ormation outside of the marketplace and overlaid upon it - can carry the
day. He manages the position according to the frequency of his information
- not market generated information, but infor mation outside the market place
(bal ance sheets, monthly sales reports, market forecasts, management,
research and development). In suffering exposure, he exits the trade in the
following situati ons: the strong investor gives the market a period of time
in which to unfold, but exits when the outside information changes,
making it doubtful that the favorabl e event will take place; the investor
who is less sure of his value asses sment will often exit using a monetary
rule of a certain percentage of his capital impaired, a procedure similar
to the already discr edited stop-loss order. The approach of both the
investor and trader calls for knowledge. The trader needs knowledge of the
market-generated information while the investor needs knowledg e of
information outside the market pertaining to the asset's value. Both need
to understand present tense conditions which support their information
source, because monitoring their position calls fo r noting any changes and
being able to relate them to one's previous deter mination. Yet neither the
investor nor the trader is willing to blindly take a profit or a loss -
whichever comes first. This is a choice forced on individuals willing to
take a chance without knowledge. With this knowledge of the difference
between approaches, a succes sful investor should be able to adjust and
tailor his strategy to become a successf ul trader, and vice versa. This
distinction was provided because the majority of individuals are using an
investing appro ach when they should be trading and vice versa. In other
words, the current trading approach manages a trade as if it were an
investment. It does not stress monitoring the market, but ignores market-
generated inform ation. A proper trading approach requires much more
management than is generally understood, and that is why the current state
of the financial industry disco urages de jure trading, encour aging de
facto investing in its place. It is obvious that both appro aches call for
informed management. Both will fail without it.

128 MARKETS AND MARKET LOGIC The Current State of Trading vs. Market
Logic This leads to the comparision of the current state of trading decision
making and the sound, logical decision-making approach. Like the
difference between trading and investing, the difference between the
current , illogical approach and the logical appro ach is the type of
information used and how it is analyzed within a decisi on-making framework
or process (e.g. , outside information related to the market versus market-
generated information related to it). In the current state, almost all
transactional inform ation, informa tion derived from newspapers, retrieval
services, and even live quotes disseminated by vendors, falls into the
classification of informa tion outside the market. (Most people are surprised
that live quotes are not included in the other category, market-generated
infor mation. But upon examination, live market quotes are not formul ated
into a statistically measurable and logically sound arrangement of data
which provides inform ation.) In other words, transactional informa tion is
either presented in tabular, numerical form or else reorganized and
presented in graphic chart form. Regar dless, the market is conventionally
presented as a price against a price. Past price high, low and close
points are then related to the current situation and used to predict the
probable course of future prices. What is needed is to capture and define
the situation as it is at present, and present a price against its logical
context (a price distinc tion). The only database that currently offers
comprehensive market information formul ated in this way is the Chicago
Board of Trade 's Liquidit y Data Bank and Market Profile. Consequently,
there is a de arth of informa tion which the trader in the current state
uses to manage his trading. But little is available which provides a fram
ewor k from which he can monitor live market data with the goal of market
understanding and hence risk-f ree trading for capital preservation. The
current approach to trading is one where the majority cannot diffe rentiate
price from value, and will conse quently have many problem s. With the
current appro ach, normal individuals essentially lose before they even
start. With this current appro ach, only the very exceptional have a
chance to succeed. The Perils of Predicting Many of the problems caused by
the current state of trading/ investing are an outgrowth of attem pting to
predict the future in a market of uncertainty. Beca use traders and
investors characteri stically attempt to predict, many practices have
developed which are supported by logical myths and are clearly counterpro
ductive for anyone wishing to improve his results.

PRACf ICAL APPLICATIONS 129 One such myth involves the use of stops as a
defensive strategy aimed at capital preservation, which has already been
discussed. When predicting, it is usual to have a point at which a loss of
capital will be accepted, and to place stop-loss orders at this point. The
placement of stops for capital preserva tion has been accepted as a
management tool when in fact it does not come from market-generated
information, but rather is an artificial parameter. Using stops is
management by price and worst-case dollar losses rather than management
by monitoring price over time. Furthermore , there can be no logical reason
for such a decision-ma king parameter. No timef rame can be established
(only a price frame), and adjustments are not easily made, since no thought
is given to change. This appro ach creates no desir e to obtain market
generated inform ation. It is an approach adopted by those who often seek
unrealistic dollar goals rather than free exposure. The use of stops
abdicates the ability to differentiate between opport unities. A myth which
has fostered the use of stops is that those who predict and employ stops
can lose much more often than five times out of ten and still have
positive results, so long as the losses are small and the winning
positions are held and ridden. Yet to perform worse than five out of ten is
to willingly accept less than happensta nce. Winning less often than losing
but letting profits run is fine in theory, but very tough in actual
practice. L osing repeatedly puts the normal individual under unrelenting
stres s. Thus, such an approach requires individual strength to an extent
not usually realized. Successf ul predicting can often be of little value.
Many market participants use information outside the market place overlaid
on the market - where this assessment is correct in a broad sense - and
still fail to capitalize on that knowledge. For example, it was no secret
that the market was in a broad advance in raw materi als during the 1970s.
The difficult task was successf ully implementing an approach, when the
volatilit y of daily activity was such that the correct position could not
easily be held through time. This illustrates the problem associa ted with
predicting even when it is correct, versus having market under standing and
managing with market-generated informat ion. Predicting in a market of
uncertainty puts most individuals in a situation where they do not benefit
from the learning experience, since they are not actively monitoring the
market . They do not consider the store house of experience they have
built up as consumers in other markets and do not apply it to their
operation in the organized markets. An analogy contrasting the current state
of trading the market to the desired and successf ul approach involves the
modus operandi of a physician treating a critically ill patient. The
doctor does not try to predict what the patient 's situation will be in
days or weeks, much to the consternation of the patient 's family. Rather,
the doctor monitor s change over time, specifically, changes in the patient
's vital signs and

130 MARKETS AND MARKET LOGIC symp toms over time. He looks fo r signs of
weakness and strength , weakness accepted versus weakness rejected. He
monitors median measurements for the patient 's vital signs, looking for a
trend of increasing strength or increasing weakness to report to the
family. To continue the analogy a bit, consider the folly if a doctor were
to use the approach inherent in a stop order - accepting the patient 's
getting better or worse, but only whichever comes first. While treating
the patient, ifvital signs dropped to a certain point or if sympt oms grew
worse to the point of the stop, the doctor would order the patient a
coffin and give up. In reality, doctors know that all situations differ and
the patient 's setbac k might only be temporary. When a setback occurs, a
doctor searches for its cause while conside ring what might counter it. The
individual who has a market understanding need not resort to predicting
the future, but can monitor the market in much the same way the doctor
monitor s his patient. Some Thou ghts on Technical Analysis Technical
analysis and other forecasting indicators as a "for profit" industry have
been quite successful and readily accept ed. One might say that technical
analysis products such as high-low-close charts, similar graphic quotation
machines, etc., have been in a twenty-year secular bull market which began
in the mid- 1960s. This is because technical analysis and other such indic
ators as products are what the "ma rket" wants. However, such tools do not
give most participants what they need. Technical analysis and other tools
focus on price as a single, clear indica tor. But when acting based on
price informa tion alone, the individual tends to be late rather than
early, and often is simply incorrect. Technical analysis casts traders in
a mode where, by concentrating on price, they are abandoning time and its
controlling and defining influence. This causes them to mistakenly treat
all situations similarly, when in fact, their own experience indica tes
other wise. In other words, identical price parameters often will trigger
trades which yield different results. It has been demonstrated that
organized markets are like other markets, and operate as they have been
operating in the normal course of business for centuries. It might be
valuable, then, to consider how business decisions are generat ed. In normal
businesses, the successf ul owner and/o r manager himself routi nely makes
key buying, selling, expanding, contracting and financing decisions based
on inform ation. This decisi on-making pro cess does not rely on a single
indicator; nor does it rely on a set of similar indica tors which have demons
trated unreliability in the past. It does not

PR ACT ICAL APP LICATIONS 131 rely on making a prediction and then acting,
with a passive manage ment approach, either. Instead, the succes sful owner
and/or manager takes what might be termed a checklist or spreadsheet
appro ach, identif ying the variables which logically impact the problem or
poten tial gain at hand, weighting their respective importance to the decision
at hand, and monitoring their up-to-the-moment status against their recent
past. He will theref ore be analyzing numerous small, subtle indicators.
For example, if he were to consider expanding his sales operation, before
making the decisions he would probably consider such things as compa ny
morale, recent sales growth , profit margins, qualit y control, anticip
ated cost increases if expansion takes place, anticip ated increases in
shipping costs, the percentage increase in capacity his current operation
can handle, etc. It is useful when reading the history of the great
mercantile empires of the past, to ponder what considera tions were
investigated prior to a business decision. If the spreadsheet approach is
what owners and managers use in other businesses, why has it not been
applied to market analysis on a widespread basis before this? The answer
is obvious. Techn ical analy sis provides what traders and investors want
rather than what they need. We would all like simple, straightforward
indica tors rather than have to assess numerous complex issues, looking at
each within the context of the situation at hand and thus having to
weight each in importance accordingly. Techn ical analysis offers what we
all would find ideal - if it worked consi stently - in making any
business decision. What a trader really needs is what every businessman
needs: a decision support system which, because it is based on his own
observation of reality, allows him to know he is identif ying all or most of
the elements which will either impact the future or indicate the present
situation as it relates to the problem or potenti al. The business ma n then
traces back (monitors) how and under what circumstances each of these
elements has performed up through the present, thus providing a fram ework
for analyzing information and drawing logical conclusions. Technical analysis
and other forecasting tools have a tremendous potential when they can be
formulated to service this need. Making decisions based on technical analysis
is highly subjective and can be used successf ully by some, as can
anything. However, consider the following questions when pondering the
added value provided to the trading/investing decision-making process by
technical analysis or any other approach to markets: 1. Is it an
organized, logical arrangement and presentation of data for a logical
purpose?

132 MARKETS AND MARKET LOGIC 2. Does this arran gement employ accepted
statistical tools which facilitate inspection, measurement, interpretat ion
and valid con clusions? 3. In providing infor mation, does this
arrangement represent conclusions that can be statistically supporte d? 4.
Does this arran gement define, organize and capture all change in the market?
5. In repre senting market activity, does it provide all the valuable
inform ation obtainable? 6. Does this arrangement facilitate interpreta tion,
understanding and decision support rather than merely make predictions? 7.
Is this presentation of data repre sentati ve of market (or general business)
logic? 8. Does it treat all prices equally? 9. Does it misr epresent
prices as market activity? 10. Does it dif ferentiate between opportunities?
11. Does it define market-created opportunities? 12. Does it differentiate
between the conditions, allowing detec tion of major market changes over
time? (For instance, the conditions in the 1970s were not the same as those
in the 1980s.) 13. Does it funnel masses of data to a point or single
entity, when in fact these data should be examined for subtle changes over a
large sample size? 14. Does it portray a large, clear and single
decisio n-ma king indicator (price), when in fact, in a competitive
situation, all decisi on-making indica tors are small and subtl e? 15. Is
it only applic able for large samples, or can a reliable reading be
conducted on a small sample size? 16. Is it hampered by happensta nce? 17.
Are the indica tors late? Does this cause a person who is

PR ACf ICAL APP LICATIONS 133 naturally (humanly) prone to be late to

accentuate this probl em? 18. Does it force people to use stops, setting
artificial parameters? 19. Does it encourage thinking for oneself or
developing experi ence? 20. Does it present buying rallies and selling
breaks as •• going with the market " when in fact a rally is
advertising for sellers? 21. Does it allow people to monitor or manage
with time, as markets do? 22. Does it put the majority of participants in
a situation where they have a statistical advantage over the large sample
size? 23. Does it put the majority of participants in a situation where
they can win before they start? 24. As currently practiced, has technical
analy sis changed the results of those who have been exposed to it? 25. Is
technical analysis conceptually logical? Technical analysis needs to be able
to incor porate market-generated information on small as well as large
sample sizes that will allow people to monitor and adjust their
decisions on a sound and logical basis. With these questions as an
indication of areas for improvement, technical analysis and all other forms
of market analysis can over time evolve into a more logical, consis tent,
practical and hence valuable tool for those in the market place. The
Logical Approach The logical approach understands that the current state is
illogical, that people for the most part do not understand what it is they
are doing (and how it is in actualit y being done) nor the implications of
the tools they are working with. The logical approach understa nds,
explains and allows for everything. It requires a market understanding as
has been discussed, a sound trading strategy and an acknowledgment of the
human factor. The logical approach rests on the following oft-repeated
facts: To be consist ent, market participants need a thought process which

134 MARKETS AND MARKET LOGIC establ ishes one or more logical reasons for
arriving at any decision, particul arly a buy or sell decision. The vast
majority of particip ants do not provide for themselves the fram ework to
do this because they assume disorganization or randomness of price as a
given in every organized market place, rather than structuring or organizing
market generated data. While they unconsciously are able to ascertain value
with a high time-price occur rence in simple and everyday markets, they
rarely apply this and other logical insights to the seemingly chaotic
organized financial markets. Indeed, when individuals apply the same
principles they unknowingly use in other, less compli cated markets to the
organized marketp laces such as the futures and stock markets, they find
that these principles hold true. They realize that despite superficial
differenc es, all markets are alike and their practical, logical insig hts
hold true for even the most complex of markets. Furth er, the majority of
participa nts do not realize the interconnection of all things; principles that
hold true in nature and in areas of human endeavor, particul arly business,
hold true in markets, particular ly the organ ized markets. The market may
be outwardly chaotic, but, as a balancing mechanism, it has an inward
sense of order which allows individuals to statistically examine it using
the bell curve. Price and value differ in all markets. Through work,
value can always be ascertained, either from inform ation outside the
market - in the case of securities - or from market -generated inform ation.
Further, price is a variable, while time is a const ant and in order
to build a trading strategy around a market understa nding, a participa nt
needs to use a unit of time as a constant with which to measur e price
activity. As already mentioned, market logic dictates that a solid
trading strategy in any market begins with an understanding of the market,
which again rests on the equation, Price + time = volume = market
acceptance = value. In other words, since the market regulates itself
through time, to be in step with the market, the individual must also
monitor himself in terms of time. In doing so, the trader will be providing
himself with enough time to assess the mar ket unemotionally, to understand
where trade is taking place and hence where a value area is being
established, and then to act accordingly. The equation for results
introduced the third section of this book: Your market understanding x (you
+ your trading strategy) = results. We have discussed the two basic types
of appro aches any participant can employ and we have discussed what each
requires in terms of this equation. This equation goes much further; it
defines exactly why most market

PRACf ICAL APP LICATIONS 135 parti cipants defeat themselves in the exchange
marketpl ace: First of all, they have a poor understanding of the purpose
of the marke tplace, and the needs and goals which motiv ate market
participants. Nor can they locate and place prices as distinguished from
value as expressed in the transactional data known as market activity.
They cannot separate the activity of the short timef rame participant from
that of the long timef rame participa nt, and the refore cannot make sound,
low-r isk decisions on a regular basis. Se condly, most participants have a
poor trading/ investing strategy which does not take into account an
understanding of themselves as human beings combined with an understanding
of the tool they are using, and thus, their strategy regularly asks too
much of them selves. Lastly, they do not understand or monitor them selves
for personal patterns, nor do they discipline them selves, so they do
not put them selves in positions where they regularly make rational, nonemo
tional decisions based on their market understa nding. They also fail to
recognize the importance of their experience in other everyday mar kets, and
the value this experience (or any experience) holds in the organ ized
markets. Taking action based on an equation for results puts reality above
all else, and enables the percentages to be put in favor of the individ ual,
allowing the average decision maker to win on the grind. It does this by
allowing him to break down each of the equation 's three com ponents for
close examination and potential improvement. The next logical step for the
individual seeking to improve results is one of the most difficult tasks in
the trading process, namely, learning how to think in an objective and
critical sense, and doing so when examining each part of the equation as it
applies to himself. That is, now that he has a framework from which to
analyze the variables of his trading or investing success or failure, he
must examine the market and his understanding of it, the potential and
necess ary tr ading strategies, and especially himself in an empirical,
pragmatic and creative manner in order to develop a consis tent thought and
action process in trading. These issues must be examined and consi dered
extensively by each individual himself . As in many areas of life, there are
no right answers, and no one other than each individual can detennine what
is right for him. All succes sful market participants have learned how to
think, act and rely on themselves, first to come up with answers to the
various components which combine to spell success or failure, and then to
implement trading decisions in the market s. In other words, each parti
cipant seeking success must develop the ability to monitor the market
and himself by continually observing, recording, reflecting, analyzing and
evaluating his beliefs and appro ach. By doing so, an individual gains
experience and insights into change in the market and himself , and can
thus become self-reliant. But this is not enough. He

136 MARKETS AND MARKET LOGIC must observe, reflect and think.
Observations, reflections and thoughts must then be placed in a structure.
And he must continually be rethinking and reevaluating, recogn izing
mistakes and altering his course, and refining his trading thought process.
5 Structure is defined by price over time, creating transactional volume.
6 In the absence of def initions, misconceptions grow. For example, the
conventional wisdom states that investing is low risk, while trading is the
opposite - replete with risk. Indeed, "investing " is portrayed as a
respectable endeavor fit for gentlemen and scholar alike, while "trading"
is portra yed in opposite terms, carrying with it a stigma of opportunism
and consid ered the domain of the boor. 7 Certainly, the conventional
differenti ation between investors and traders can be made: investors wish
to own the item whereas traders buy to sell. However, the agreement can be
made that both buy to own, with an intent to sell for a profit. These
distinctions thus become one of timef rames, i.e., how long the holding
period will be. g A successf ul trader, like the investor, will hold his
position over time when his information indicates that the position is
working well and the opportunity will carry the day. The trader particularly
(rather than only, as is the case with the investor) succeeds when an
over whelming trending opportunity occurs. But the trader is usually far
more active than the investor, because trending markets which reward
patience are but a small percentage of all opportunities -- most
opportunities call for a combination of many active skills, rather than only
for patience.

12 A MARKET UNDE RSTANDING D eveloping a market understanding is a large

undertaking which can be begun by reviewing the first two sections of this
book.

13 YOU W ith a good background in market understa nding, it is possible

to have an up-to-the-minute, 100% understanding of a par ticular market at
any given time. And every participant with a good market understanding
should employ a sound trading strategy (detailed in the next chapter) which
over time should mean success. But, as stated in the beginning of this
section, successf ul trading requires an understanding of much more than
the market and a sound trading strate gy. It requires making sound decisions
on a regular basis. Yet most traders concentrate primarily on discovering
the direction they feel the market is headed, giving diminished attent ion
to their trading strate gy, and the least amount of attention to them
selves and how they function as humans and confident, rational decision
makers. Yet it is the last category - the " you" part of the equation - which
is the most important element in the trading process. Everyt hing else can
be learned. Most participants in every market place fail because even when
they have an understand ing of the market, they do not understand or
monitor themselv es, and they cannot discipline and control them selves.
Ther efore, they cannot put them selves in positions where they will
regularly and consis tently make rational, nonemotional decisions based on
their market understanding. In other words, the weakest link in a
trader's approach to a market is often himself . Overcoming this truism
is by far the most difficult challenge every trader faces. The first step
a trader must make when considering how to ad just for and improve the "you
quotient" is to realize that he is a member of the human race. In other
words, he must compa re and contrast

PR ACfICAL APPLICATIONS 139 himself to the frailties and strengths of human

beings as a class. While he cannot put himself outside the human race, he
may deviate from the norm in certain areas. Some broad observations ofthe
characteri stics of the huma n race at this point in our evolution include:
Man 's powers of observation are no longer critical to his survival and thus
have declined through underus e. Man 's ability to think for himself
analyti cally has also declined through lack of use. The structure of
civilized society combined with technology 's impact on humankind 's
environment does not encourage either observation or inde pendent thinking.
Man as a class would prefer to be led and told what to do rather than
think for himse lf. The success of modem adver tising attests to this. Man
as a class is inconsis tent in his behavior: he will respond differe ntly to
the same situation and set of data depending on mood, stimuli, etc. Furtherm
ore, his capac ity and percep tions will change throughout different
stages in his life. Man as a class does not enjoy the feeling of being
either physically or ideologically alone, especially in stressf ul
conditions. Man as a class does not want to be left out or left behind. Man
as a whole tends not to have an accurate sense of his own self-worth. He
tends to overinfla te or underinfl ate his self-worth, thus impacting his
perceptions of reality. Man as a class has a natural tendency towards
lack of self-confidence. Man as a class is jealous of those who have more
than he. Man as a class often thinks he is improving when he is not. These
character istics combine to complica te man's decis ion-making ability. His
perspective is regularly clouded by hesitation, euphoric impulsiveness and
overconfidence, anxiety, ambition, prejudice, mel ancholy, self-grati
fication, laziness, jealousy and egoti sm. Minimizing

140 MARKETS AND MARKET LOGIC these tendencies of modem human nature is
the most difficult task fo r anyone to overcome. But despite these prob
lems, modem man as a class also has numerous assets. He can often
successf ully think - when for ced to - and he can manage himself and often
lead others when circumstances are right. He can learn from his mistakes
and experiences, as well as the mistakes and experiences of others. And
he has an amazing resilience, which, combined with the ability to learn,
teach and lead, allows him and his society to adapt and change when the
environment calls for it. Thus, civiliz ed socie ty is not a closed society,
it is flexible and open to change and improvement. Knowing Yourself and
Your Patterns It is important to study your character, personality, and judg
ment under varying conditions, just as you would study market activity. Self-
study is important not only for personal development, but for development of
your trading, since how far you can succeed in the latter is directly pro
portional to the extent of your development in the former. The challenge
which every market participant and every intro spective person faces,
then, involves ackn owledging himself as a thinking, feeling human being.
To do this you must know your abilities. This self-knowledge enabl es you
to be able to stay within your abilities, and comes only from monitoring
yourself for patte rns, just as you would monitor other market participants
or market activity. In other words, every market participant needs to study
himself and his trading patterns, with the goal of under stand ing himself,
his patte rns, and his capa bilities, and with the ultimate goal of using
this informa tion to improve his trading and/or investing performance. One
valuable ability which aids this study might be termed behav ioral
perception, the ability to study the behavior of price, time, other
participants and yourself. To cultiv ate this ability, you need to be alert
enough to make observations, and have the desire to remember them, the
energy to reflect on them, and the intelligence necessary to place them in
their proper structure and evaluate them correctly. This process produces
both a market understanding and self-knowledge which reduc es risk. When
combined with the discipline provided by a well-developed "you," it
totally eliminates risk over a large sample size of trades. How do you
study your own characteristics to discover how and where you differ from
the crowd? Simply consider what you do not do well. Each of us has many
things he does not do well. And what can you do well? What are your
behavioral patterns? How do you perform when you are tired? Are you more
objective after a vacation? After taking profits versus after taking
losses? Can you easily reverse your

PR ACT ICAL APP LICATIONS 141 position in the market, or do you feel uncomf
ortable doing so? Only you can ascertain your abilities by looking at
yourself, and you should probably reach your conclusions based only on
your own observations. The next step in understanding yourself and your
behavioral patterns lies in seeing and facing reality. In other words,
after you have critically found and defined your capabilities and personal
patterns, be satisfied with what you find. Concent rate on being happy
with y our self. While trying to improve your ability to handle situations
that you can not currently handle well, strive to understand and gravitate
toward those market opportunities which you know you can handle well.
Acknowledge that you will make mistakes, and that making the wrong
decision is much easier than making the correct one, although you won 't
always know simply by the outcome. For example, the tired trader often finds
he does not really control himself very well, thereby making emotionally
motivated decisions, which, no matter if they result in profit or loss,
are nevertheless mistakes. (In other words, do not trade when in a
weakened state or when particular skills or capabilities which you find
yourself lacking are called for. Don't expect too much from yourself, the
market or others .) The goal of this entire exercise? Simply put, when
you have an understanding of the market and an understanding of your
own capabilities, you can begin to match your capabilities to the opportuni
ties the market regularly presents that are suited to what you can
handle. This brings in the point that there are two things you need to
consider before initiating a trade: the market opportunity (prefe rably
rating it and then weighting it; see the next chapter) and how well you are
trading at the time that opportunity comes up. Sometimes, when the
opportunity is special, you will want to stretch your range and attempt to
operate above what your past has indicated. But this should be the
exception rather than the rule. True self-knowledge and strength is
demonstrated when you can feel good about passing up some very attrac
tive opportunities which your current mental, emotional or physi cal state or
capabilities makes you feel uncomf ortable in tackling. Avoiding Emotional
Decisions It is important to remember that in all areas of practical life,
reason and logic are regularly overwhelmed by the natural tende ncies of
hesita tion, euphoric overconfidence, anxiety, ambition, prejudice, melan
choly, laziness, jealousy, egotism, and the need for self-grati fication.
These tende ncies occur in individuals involved in the marketplace as they
do elsewhere . Indeed, they may be compounded in the futures markets and
the invest ment field in general , since when the individual uses leverage,
success can spell quick wealth while failure can mean correspondingly quick
financial ruin. Such possibilities create anxiety,

142 MARKETS AND MARKET LOGIC particularly in the decision maker who is
less informed. Clearly, one of the most difficult challenges the trader
regularly faces is to avoid making decisions not firmly grou nded in reason
or logic. The first step toward avoiding emotional decisions is having a
market understanding which provides sufficient information to allow the
trader to confi dently generate his own decisions. Having a market
understanding allows the trader to develop an appro ach to the market and a
trading style that is dependent on himself, not others . Another way to
decrease the propensity for emotionalism is to slow down. In order to achieve
consis tently successf ul results, you certainly need to originate your own
ideas, but then also have time in which to carry those ideas into
action. Trading in the instant does not provide time to make a relaxed
decision without undue pressure, since you are always reacting to what
somebody else has done, and therefore are subject to substantial stres s.
One way to avoid making emotional trading decisions is to trade from a
longer timef rame, never reacting to a single price or a single bit of
market-generated information. A third way to decrease emotionalism is to
realize that you cannot be better than you normally are over time and that
your trading strategy has to refle ct this. In other words, the percentage of
time in which you can be at your best is limited, and by acknowledging this
you can lower your expectations of your performance. Most participa nts ask
them selves to be at their peak potential all the time, inadver tently
placing them selves under great pressure. Another point to be made is that
the current success level that the individual controls is not entirely in
his hands. The attractiveness of market-created opport unities varies. Thus,
superior results cannot be attributed to your abilities alone, but rather
to the matching of your talents to the particular opportunities available.
The last point to be made is that few humans can trade unemo tionally
when concentrating solely on money or the financial aspect of their market
opera tions. Concentrate instead on monitoring market generated infor mation,
your behav ior patterns, and other factors involved in making a trading or
investing decision. The Trader's Biggest Problem Conventional wisdom
emphasizes that the emotions of fear and greed motivate every market and
that these two emotions are the trader's greatest enemy. These statements
do not displa y a deep understa nding of human psychology. The key
emotional factor in market beha vior is also the biggest roadblock to
effective decision making. It is the hardest emotion for every trader to
contr ol: the propensity toward hesitation, toward being late. The average
market parti cipant is always late - whether in initia ting a position or
exiting a profitable or losing

PRACfICAL APP LICATIONS 143 position. Rather than greed, the opposing
emotion tends to be impul siveness, a " rushing in blindly" that is
usually accompanied by a euphoria or emotional high that often follows
success in the market place. Both responses cause reason and disciplined,
logical decision making to lapse, often causing the participant to become
vulnerable to taking action as an emotional response. Traders and investors,
as humans, want company, and it is a rare person who does not have any
problem being alone in a major decision. Yet opport unities at their ea r ly
stage, by defin ition, are not going to have a lot of people taking
advantage of them and in fact are going to have many people doing the
opposite. Thus, not hesitating when acting logic ally is difficult due to
basic human nature. It asks for an uncharac teristic human response. It is
for this reason that making the right decision and acting on it when
called to is often very difficult. Hesita ting and consequently being
late are more comf ortable and reassuring than being early. This is often
because of self-doubt or fear of going against the crowd. In other words,
hesit ation is not a problem when the trade is obvious (and over), because
the decision is not one which goes against the crowd. Euphoric impulsiveness
is caused when you are exuberant and overconfident from a recent success.
Euphoric impulsiveness causes you to get careless and overconfi dent and begin
to see things that aren't there. It is imperative to be aware of your
individual propensity for having such emotional lapses. Hesita tion usually
occurs when an individual is not perform ing well, while the opposite is
true for euphoric impulsive ness. When one is doing well one tends not to
hesitate. One way to control your propensity toward hesitation and being
late is to blank out all past negative experiences and all past incor rect
decisions. Seek to be positive about everything and have no fear. Big
doubts will not help generate effective, rational decisions. Instead of
negative experiences, concentrate on the present situation and on visualizing
an unfolding market. Once you are aware of your individual prope nsities,
strive to react to an opportunity logically but automat ically, like the
tennis player who gets an opportunity to crash the net and put away the
point, but only if he reacts automatically in taking advantage of the
opportunity . In other words, reacting as such must almost become a
refle x. Hesitation in either sports or trading may mean that the
opportunity is over before one has had a chance to capitalize on it. On the
other hand, being impulsive, or acting without reason or patience, is also
clearly a major fault. The key is to visualize several possible scenar ios, to
have solid reasons to act, and to be early, yet patient. Monitor yourself
to be consi stent at this.

144 MARKETS AND MARKET LOGIC It is important to remember that regardless of

your propensity, it will prov ide both a zone of benefit and a zone of harm
over the gamut of decisions. For example, the person who hesitates wants
to be sure that he is correct, much like anyone reading this book or
attending a class on trading technique. He is not by nature impulsive, and
therefore benefits in such situations which do not require instant
decisions. A conflict occurs when the same individual is forced to operate
in a very short timef rame situation where hesitancy can spell disas ter.
In other words, hesitation has its benefits for the second or longer timef
rame participant while impulsiveness benefits the shorter or day timef rame
partic i pant. While you may either be hesitant or impulsive, one
characteri stic will be more dom inant and should be used to the fullest in
situations where benefits accrue. Likewise, the domina nt tendency should
be neutr alized where such a reaction may harm. The issue is not to
change , or develop the ability to sh ift your natural tendency. Doing so would
put you in a position of working with a variable rather than a known
constant. In other words, you cannot ask yourself to flip back and forth
between situations which require hesitation and those which require
impulsiveness, and handle each situation as adeptly and aggres sively. You
do not have to be outside your normal pattern of behavior to maximize your
potential effectiveness as a trading/investing deci sion maker. As you can
see and probably already know all too well, effective decision making is
very difficult. Again, it is so because it runs counter to man's natural
emotional tende ncies. After you have a market understanding and are
confi dent in your analys is, the remaining stumbling block is major but
subtl e: you must teach yourself to do what you know you should do. A point of
comf ort should be taken knowing that often, the more difficult a decision
is to reach, the more correct it is. Regardless of the diffic ulty, though,
personal control in the decision-ma king process is paramount. Once an
individual has a good market understanding, he may spend 15% of his energy
analyzing the market and 85% working on disciplining himself . Usually,
the suc cessf ul trader and investor, the person who regularly makes the
difficult and correct decisions, is fighting to control himself , yet never
outwardly displa ying the battle. Change Knowing yourself and your tendencies
is impo rtant since it allows you to accept your characteristics as
constants, thereby allowing you to accept opportun ities that require or
feature those traits. However, it is important to recognize that you and
your capabilities will vary from day to day, week to week, and year to
year.

PRACfICAL APPLICATIONS 145 As stated in the intro duction to this

section, human beings are constantly in flux. In other words, they are
not naturally consi stent; they change due to different stimuli and
different moods, throughout the various stages oflife. Several assertions
are about to be made which are not based on stereoty ping, but rather on
observations of the majority. Clearly, they will not hold true for
everyone but will illuminate transition for many. Characteri stically, the
beginning part of life is ruled by the sub conscious, so younger or less
experienced traders tend not to have a control ling fear of the consequences
of their actions, and tend toward euphoric impulsiveness. The middle part
of life, on the other hand, tends to focus on avoida nce of painf ul or
negative experienc es, such as the aggrav ation that a monetary loss
causes, and one's conscious negative experiences tends to rule over the
subconscious. In other words, hesita tion as a pattern of behavior sets
in very easily. Con sequently, younger traders tend not to exercise enough
caution while middle- aged traders often tend to be too cautious. In the
last part of life for most people, the subconscious and conscious become
integrated and are working together. Major financ ial responsibilities and
commit ments have been fulfilled and financial gain takes on a less
emotional meaning and becomes more of a game. The point is that you
should recognize that your capabilities will vary from day to day and year
to year. You should strive to build on experience with the market and
yourself and learn, but keep in mind that you need to be flexible and
alert to the abnormal, since both the market and you are changing over
time. The informed partici pant is const antly aware of where he is in
his life, guarding against his impulsiveness and lack of fe ar on the
one hand, and his overly restrained conscious self and the resulting self-
doubt on the other. Getting to Where You Belong Many of the points
mentioned are superfluous to certain very fortunate people. But these
people are few in number. By far the majority fail to analyze themselves
critically and map out their own course in life, a course chosen not to
imita te others , but to maximize their individual strengths and minimize
their weakne sses. Short-circuited by society 's expectations and chosen
routes, they don't end up where they are comf ortable and can function
happily at their highest level to provide the most value to society. But
those who have arrived enjoy vast insig hts into them selves, their needs
and the true meaning of success. Getting to where you belong in life is very
difficult. Consequently, the person who has found himself , mapped out his own
course and then has arrived, is doing what he wants to do. He is low-
keyed and even-kee led. He has a lot of self-confidence and has no need to
try to

146 MARKETS AND MARKET LOGIC impress others. It· is because he is very
self-assured and confident of his abilities that he doesn't have to prove
anything to others. Interest ingly, the background of many of today 's very
successf ul traders and investors as a group demonstrates the ability to
migrate to where they belong - where they are happiest - in life. The
highest level of realization and self-sufficiency is attained by defining
and then attemp ting to fulfill your own concept of success. But before
defining it, you must understand that gaining it requires both a great
amount of self-knowledge and the rare abilit y to act on this knowledge.
Stress One conventional wisdom has it that trading in any market, especi ally
futures, is an especially stressful business. Stress is caused by living
with probl ems. Rather than live with a prob lem, you should seek to
eliminate it. In other words, the only stress you should expect from being
an active market part icipa nt occurs when you are wrong but do not get out
of the posit ion. The human element in you will register stress when your
subconscious is being overruled by your conscious level. This comes from
experience or a great deal of exposure in the market place. As you
understand yourself, you will naturally discover how you feel when you
have a bad position on and do nothing about it. Seek to train yourself to
know that you are wrong by being in tune with your body 's reactions -
especially your reactions to stress. Conclusion This chapter has focused
on the conclusively variable element in trading, that element we define as
"you. " The next section discusses strategic consi derations you should
ponder prior to and while you are taking action in the market. These two
sections overlap to a significa nt extent , which is a reflection of the
interrelationship between an understan ding of yourself , and the strate gic
implica tions which corne out of this understanding.

14 TRADING (AND INVESTING) STRATEGY AND TECHNIQUES I t was pointed out

earlier that very few participants can be as good as is called for in the
currently accepted appro aches to trading and investing. Certainly, there
are those who are very successf ul participants who have overcome and can
overcome a lack of under standing of the markets. However, these individuals
are very rare, because they can function at a very high level without
sufficie nt informa tion and therefore under trem endous pressure. Few of
us actually understand (before discovering the hard way), how diffic ult it
is to be such a parti cipant on a consis tent basis. How then, is the average
person to succeed as a market participa nt? In a word, strate gy.
Strategy, in a general sense, is the modus operandi an individual chooses,
believing that employing it will help him steer clear of the barriers
between him and his goal. A trading strategy is nothing more than a game
plan of universal principles and tactics which is mapped out before trading
is consid ered. Strategy involves developing an approach to the market which
will neutral ize an individual 's human frailties, those tendencies which
prevent him from attaining succes sful results. Your trading strate gy, as a
subset of your overall market appro ach, must therefore take into account
your individual personal, physical and psychological strengths and weakne
sses. Thus, your trading strategy must be tailored only for you. It must
be developed from the perspective of what you yourself currently are, not
what you would like to be or what any other person is. By adjusting for
your market understanding and your "you, " a

148 MARKETS AND MARKET LOGIC sound strategy allows you to win over the
large sample size of trades. Once it is mapped out, adherence to the
strategy should be strictly self-enf orced. It should be enforced just as
stren uously decades into your successful trading-investing career as it
is in the early days immedia tely following its development. This done,
assuming he has the self-discipline necess ary to follow the plan, the
individual puts himself in the position of ' 'winning before he begins . ..
In other words, you understand what you're working with, and are prepared so
that over the large sample size or longer period of time, you will
necessarily achieve the goal. Hence, a subtle benefit of mapping out a
strategy is that it allows you not to be overly concerned with failures in
the small sample size. Structuring Success When structuring a strategy,
the challenge every market participant faces is starting out. Starting out
is more complex than most of us first realize; if appro ached incor rectly,
an individual 's start can also easily be his finish. The ' 'you" section of
this book discusses the importance of making a critical self-assessme nt.
Once this is done, and assuming a market understanding has been developed
through observation, one should begin trading or investing. One of the
central theses in this book has been the universality of markets and of
practical existence in general. Illustrating another universality, starting
out in trading/inv esting is like startin g out in any other business. You,
as a beginning market participant, should con sider your market operations
as a new business. You can be consi dered as the new factory. Intelligent
management always strives first to get the product out of the factory
easily and effic iently before trying to boost production. Once you are
able to take the raw materials (the market, your understanding of it,
and yourself) and produce the product (consi stent profits over a
reasonable sample size) then and only then can you boost volume. In other
words, it is wise to trade in the smallest possi ble unit size until the
learning curve has risen and flattened out and profits are made regularly.
Furth ermore, as a mature market participa nt you should continue to monitor
yourself like corporate management should monitor the fac tory: you have a
potenti al, a capaci ty and an operating level. The key is to match yourself
up with opportunity, taking into account your abilities at the moment. In
other words, you should trade at or below capacity most of the time, just
as the factory should be run at or below capacity most of the time. If you
are trading below capac ity at your operating level, there is less stress,
and you will most likely make a higher percentage of nonemotional
decisions on a consis tent basis than otherwise.

PRACfI CAL APPLICA TIONS 149 The point is, the successf ul trader must
become his own manager and strive to improve in all three levels. You must
strive to build a bigger, more effic ient trading ability boosting
potential and capacity. You may then safely boost your operating level.
As an intelligently managed factory, you should reserve your poten tial for
the opportuni ties of windfall profit nature, since no plant can operate at
its potential for long without serious problems. Logical Market Realizations
A solid trading strategy necessitates several realizati ons. The first and
probably the most impor tant as far as trading strategy is involved is
this: A participa nt with a solid trading strategy must always have a
sound reason for making every buy-sell decision, a reason based on his
market understanding. A second realization is that opportunities differ
and hence the appro ach, choice of tools and size must reflect the
particular oppor tunity. In other words, the opportunity dictates the trading
strategy. Thus, the tool for situation (futu res contract, option,
outright cash transaction, etc.) and the size of the transaction (small,
medium, or maximum) must depend on a self-generated evaluation of the
situation. A third realization which has been mentioned under the "you"
section is that the enlig htened trader not only understands the attrac
tiveness of the opportunity; he understands and applies the proper
strategy not only to the opportunity as it relate s to the market but, most
importantly, to himself . Your evaluation must take into account an
assessment of the market plus the degree of market understanding
possessed at a particular moment, your recent performance, recent and
current comf ort level, and total financial condition. A solid trading
strategy is therefore indiv idually tailor ed to each participant 's abilities,
risk tolerance, and comf ort level continually as it unfolds. Another
important realization is the importanc e of understanding - in a strategic
sense - the tool being used. In other words, a sound strategy allows you
to be wrong on any one trade or a small series of trades without the risk of
ruin. Thus, a solid trading strategy is never so aggre ssive that the
partici pant becomes uncomf ortable with his position, monitoring it in
emotional terms, calcul ating the money involved, or exhibiting any other
pattern which distracts from the calculated and objective decision-ma king
process. You should be sure to evalua te and learn from your overall
performan ce, especially the mistakes. This, over time, will provide
trading experience, a develop ment of the soundness and consi stency of
one's evaluation. In order to use any tool, you must thoroughly
understand the principal behind it. In a market of uncertainty , anything
will work 50% of the time. Most of the tools utilized today have a degree
of merit, but

150 MARKETS AND MARKET LOGIC the failure of the knowle dge of the
principles involved causes that participant tool to be used out of context.
In order for a tool to have value to the user, it needs to show a
consi stent behavior beyond the 50-50 happensta nce. For example, there
are indica tors which will produce results ranging forward whereby they
will work 60 times out of 100 to 90 times out of 100. A common misuse of
the tools will be not to go beyond and understand the situations that are
most favorable for their employment. (In the final minutes of a closely
contested basketball game where fouling and the ability to convert at the
free throw line will be the deciding factor, which informa tion is more
valuable to the coach, knowing the free throw percentages of each
individual on the opposing team fo r the year or knowing each individual 's
free throw percentages in the closing minutes of closely contested games?)
It is easier as a human being just to accept and use for any situation a
tool that worics some of the time, and employ it in an indiscriminate manner
all the time. Yet from a strategic sense, one should always be looking
for the underlying conditions, with the goal of improving percentage s.
Another major strategic realization is that all tools are going to be
effective during some phases of a market, but since the conditions and
behavior of every market change, so will the usefulness of every tool.
Thus, it is impor tant not only to understand your tool, and under what
conditions it has a high prob ability of woricing, but also understanding
the correct phase of the market it works in. Yet another important
realization: one should always be aware that the short run can be an
aberration of a small sample size and that happenstance rules any market
of uncertainty. In other words, success over the near term does not
necessarily mean that one's strategy is correct. It is very easy to
produce sought- after results while being wrong. When you are doing
something that you know to be incorrect, but your mistake never theless yields
sought-after results, do not think that the appro ach might be right. A void
it in the future. In other words, any tool which you think is good may not
be of any value over a large sample size. Preventive Trading A sound
trading strategy is one in which the participant avoids trades which can
result in major losses in capital. With such an approach, a trader does
not need to predict the market and/or enter the market with a predeter mined
profit and loss ob jective, but to merely look for those situations that
offer "free exposur e. " Trading for free exposure is seeking to enter
into and hold a position in the market for a fixed period of time without
fear of losing capital during that period. The goal of seeking risk-f ree
exposur e is not to make money on any one trade, but

PRACf ICAL APPLICATIONS 151 merely to enter a situation during which one
cannot lose. Doing this autom atically exercises " prevent ive trading. " In
other words, in monit oring the condition of the market, look for signs of
strength or weakn ess, and enter the market only when you elimina te in
your mind the possibility of the market moving in one direction. An over-
simplified example might be the following: the market indica tes weakness
and is in a long-term down auction, mainly due to initia ting activit y on
the part of other timeframe sellers. You are looking for an opportunity to
sell above value. Suppose that today the market displa yed initiating
selling at the top of the range, responsive buying at the bottom, and net
responsive buying in the value area as indica ted by a time-price opportunity
(TPO ) count. Next, a new item is announced which motiva tes a reaction
on the part of the short timef rame, day timeframe particip ant. The
market rallies a distance normal for this market for an hour's time period
according to recent observa tions. At this point, a short position can be
enter ed. The market should not continue to rally, since it has rallied far
enough to neutralize the news event, and the market's structure is weak to
begin with. One of two things will now happen: either other timef rame
sellers will enter the market, responding to price above value, or they
will not. If they do, they will do so shortly, and the position will
begin showing profits quickly. If they do not, loss of capita l is not a
major factor for the next half hour, since the market has already rallied
and will most likely consolida te for a while. Enter ing trades with ••
combinati ons" is a key strategy in preventive trading. In other words, in
order to lessen the risk of losing capital it is important to have fall-
back positions. For example, say that the market conditions are such that in
a strong down auction, there has been initiating selling at the top of the
range, respo nsive buying at the bottom , and net responsive buying in
the value area as indic ated by a time-price opportunity (TPO) count. If,
because of a news event, the market opens 20 tics higher the next day, one
has a situation where responsive selling should be apparent. If it is not
appa rent early in the trading session, it can be expected at the top of the
range . If it does not occur, the next fall-back positio n is that initiating
buying is not expected at the higher prices. Prev entive trading and using
combinations as trading strate gies are import ant because they allow the
individual to avoid suffering bad exposur e in the market place. Bad exposur
e is bound to affect perform ance adversely. An example of this in sports
might be the baseball players who find themselves in a position of having
two strikes and no balls. They will not bat as well as they would with no
strikes and three balls. If an individual const antly gets into a situation
in which failure threat ens, he is simply not going to do as well as he is
capable of doing

152 MARKETS AND MARKET LOGIC without the pressure. Study Your Results
Once you are in tune with your capabilities and personal patterns, it is a
good exercise to regularl y examine your profit and loss statem ents,
pondering each and every trade to determine when it was made, why it was
made, and your state of mind before, when and af ter it was made. This
will help unlock your individual trading patterns. If you are systemati
cally wrong and you know why you did what you did, all you will have to
do is the opposite. Some common trading patterns might be being constantly
early or constantly late; taking profits and/or losses too slowly or too
quickly; or essentially what you do, and how you do it. Look fo r what you
did well and what you did not do so well. Again, look at the results, and
always try to improve. Being Early We have consid ered that time regulates
price promotion activity and that risk is a function of price and time,
not just price. (Knowing this, we will soon consider the logical necessity
for weighting trades .) Indee d, understanding time is the last key element
standing in the way of achieving a sound trading strategy, and will probably
be the key to improving your trading pattern. Specifically, few trader
/investors consider: 1. The concept of their individual timef rame. 2.
Whether or not it differs from the timef rame they are trading from. 3.
Whether or not it differs from the timef rame they are expecting results in.
In other words, most traders could benefit from consid ering the
timeframe their situation and personality are best suited to, the time frame
they are trading from, and comparing that to the timef rame during which
they expect the market to move in their favor. Curing the Trader's Biggest
Problem As mentioned in the previous chapter, the biggest mistake people
make in any endeavor is hesitating and thus being late. It is the same
in trading and investing. We all face a natural human tendency toward
lateness. The adage "buy low, sell high, " can easily tum into the
opposite for those participants who have the problem of chronic lateness.

PRACfICAL APP LICATIONS 153 Being late is caused by the natural tendency
to hesitate, com pounded by the fact that in markets, usually the best
decision is the one most difficult to make, as it often flies in the
face of activity in the immedi ate past. Humans hesitate to be "sure" and
thus more comfort able, rather than being impulsive, alone and uncomfortabl
e. Another factor that greatly adds to the propensity to hesitate lies in
the fact that most situations are very competitive and the opportunity
itself isn't so obvious. The Goal of Every Market Participant In any decis
ion-making process, an unenunci ated timing spectrum exists. In other
words, assuming an objective " best time to imple ment" point exists, the
decision can be implemented on a time spectrum ranging from very early
to early to on time, on time to late and then very late. To ask yourself
to consi stently be on time is to be unrealistic, because great
opportunities offer a small window during which to act, and timing entry
into that window perfectly is a rare occasion for most. This problem can be
neutralized if you design ea r ly indica tors, signals that will allow you
to hesita te and still be able to time the trade so as not to be late. This
is extremely important in competitive instances where the majority of
indicators are not clear-cut, but are perceived as invisible. In other
words, the majority of individuals must be satisfie d to ad just their timing
to compensate for their humanity. They must be satisfied being nearly on
time most of the time and being perfectly on time only occasionally. Most
individuals can adjust by aiming for the "early to on time" area rather than
the "on time" area in the timing spectrum. This insight displays an
understanding that planning to be early will not always translate into
being early, given that human tendencies toward hesita tion will often
cause an individual to lose time in the decis ion-ma king process anyway.
Implementing this means taking two actions: first of all, concentrate on
buying breaks and selling rallies most of the time rather than vice versa.
Secondly. conc entrate on acting in the market alone . being in step with
the market and monitoring and trading the market in your timefram e. Some
Myths on Risk While your trading strategy is dependent on your market
understanding as it relates to your needs and abilities, it is also
intimately tied to your assumptions about risk. Consider several false
assumptions which exist concerning risk in markets and risks associa ted
with taking action in

154 MARKETS AND MARKET LOGIC them . Consider specifically how each of
these false assumptions tends to reinforce a losing trading strategy. The
first false assumption illustrate s the importance of combining a market
understanding with a conservative trading strategy before taking action in
a market. It is widely promulgated that liquid markets, particularly the
futures market s, exist because they enable someone who doesn't feel comf
ortabl e holding a position in the market to be able to transfer his risk to
someone who will take the risk in hopes of reaping speculative profits.
Hence, it is said, an organized exchange provides a vehicle for risk transfer
where every participa nt who is not relieving himself of risk is taking on
risk. However, informed participants who have a cohesive approach to the
market grounded in a strong market understanding, and expressed in a solid
trading strategy, really assume no risk over a large sample size of
transactions. Thus, knowledge reduces risk. If an informed parti cipant
does not have a strong market understanding on any one trade, he disci
plines himself so that he doesn't make the trade. Thus, knowledge plus
discipline elimina tes risk over the large sample size. While over a large
sample size, there is no risk transfer for the informed participants,
risk is transf erred to the uninfor med, undis ciplined majority - those
without a market understanding who inevi tably lose. Thus, those with a
market understanding and a cohesive approach have a risk profi le similar
to the gaming companies that operate casinos in the world 's major
gambling resorts, or to large, well-m anaged insurance underwriters . In
other words, while risk is assumed for the small sample size - every
individual transaction - risk of loss is factored out over the large sample
size. (In the casino example, the customer receives entertainment and the
short-term possibility of winning money, while the gaming company which
owns and operates the casino receives a profit over the large sample
size. Since both sides receive value, regar dless of loss to the customer
or profit to the casino, a zero-sum situation does not exist. Likewise,
insurance underwriters provide a risk transf erence vehicle and peace of
mind for individuals while making a profit over the long term , again
negating the zero-sum argum ent. Futures markets clearly are not zero-sum
games, any more than casinos or insurance companies are.) This brings us
to an important realization: In any market, and especially the futures
market, informed participants who have a cohe sive approach to the market
grounded in a strong market under standing, and expressed in a solid
trading strategy, cannot be con sider ed equal to other participants,
since they really assume no risk over a large transactional sample size.
In other words, every participant who is not relieving himself of risk is by
necessit y taking risk over the large sample size.

PRACf ICAL APPLICATIONS 155 Thus, contrary to the findings ofthe academic
community, " beating the market, " the much sought- after dream of every
investor-trader, is in fact possible. Of course, anyone who reads the
popular financial press knows not only that beating the market is possible,
but in fact exists, since there are numerous very successf ul market
participants. But beating the market is now in fact very possible for a
significant portion of formerly unsucces sful participants with the
promulgation and application of the principles contained in this book.
Beating the market is done merely by trading and/or investing from the
posture that most well-t hought-out and well-m anaged businesses assume,
using the principles most people unconsciously apply in unorganized markets.
In other words, if a person can get strong in each of the areas on the
left-hand side of the equation for results, he will be in the situation
where his market participation will be profitable over the long term. At
this point, he will essentially be winning on the grind much like the
casino or the insurance underwriter. A second false assumption about risk
is reflected in the notion that the greater the risk, the greater the
potential reward . Nothing could be more completely false, particularly when
viewed �ver a large sample size. The more risk you take, the less you will
make, again, especially over a large sample size. To illu strate ,
consider the example of the risk associa ted with purch asing a used car.
In the fi rst scenario, a mechanic is aware of the condition of the car and
knows that it is worth $2000. If he can buy it for $1000 at a bankruptcy
sale, he is taking virtually no risk, yet he should make a very
substantial percentage return. Contrast this to a second scenar io: an
auction situation where the buyer is not a mechanic (and hence is not
in a strong position to evaluate the car's condition and value). Assume
fu rther that he gets emotionally excited and purchases the same car for
$1800, thinking he can sell it for $2000. The auto purch aser's risk is in
fact much greater in this second scenario, yet his potential for profit is
much smaller. The third false assumption about risk: viewing a potential
market opportunity in term s of a risk-reward ratio is the wrong way to
assess risk. An example is the buyer who purchases hoping to receive 4x in
profit, but vowing to get out if the market falls to a level where he
would lose x first. This strategy is implicit in the pre viously mentioned
common losing trading strategy which relies on the use of stop-loss orders.
Market exposur e and risk tolerance should not be predicated on price
alone but always on a combination of price and time. In other words,
risk is a function of time. Thus, the risk of every oppor tunity should be
analyzed from the standpoint of how much time one has before one must
exit the particular trade, as mentioned in the discus sion of combinations.
This is following a well-t hought-out investment

156 MARKETS AND MARKET LOGIC strategy wherein the investor purchases below
value and holds over time. The more time one has in which to hold the
purchase and make a decision, the more data one can look at and the
less risk one is exposed to. To illustrate, the person who absolutely
has to sell his car today because he needs the money is a short timef rame
seller and is not in as strong a bargaining position as the fellow who does
not have to sell under pressur e, but can do so at any time over the next
six months, waiting for the best offe r. In the latter example, risk is
reduced wher eas in the form er, risk is enhanced and an emotionally motiva
ted decision is likely. When initia ting a position, one must consider how
much time one has to hold the trade and make a decision on whether to take
a loss, make a profit, or break even. The Importance of Weighting Trades
Now that several myths on risk have been debunke d, consider some
practical implications: Given that all prices and hence all market
opportu nities are not the same - some are more attrac tive than others - and
given the falseness of the third false assumption of risk, namely that risk
should be handled as if it were a function of price rather than a function
of price and time, and finally, given that as individua ls, we function at
different levels of effectiveness at different times, the resul ts-or
iented participant who understands all of these can now begin to formulate
strategy . He monitors the market and himself , distin guishes between
very attrac tive, attrac tive, and average situations and weights the size
of his position accordingly. If you can differen tiate between
opportunities, assess risk, then weight trades properly, you will have a
better win-loss record on what are categorized as the most attractive
positions than on what are categorized as the everyday opport unities.
This puts you in a position where year-end results are better than your
overall trading average . In other words , if each trade is recorded as
either a win or a loss, your overall win-loss record for the year will
be a lower percent than your win-loss record for what are perceived to be
the lowest-risk trading opportu nities, which are more heavily weighted, or
lar ger sized posi tions. Weighting trades puts the participant in a position
where he does not have to make an exceptional percentage of correct
decisions, since on the large positions, which will make the major results,
there are only a few decisions to make. For example, over a small sample
size, a coin can be flipped and come up heads three times in a row.
Likewi se, a sample of three big trades can have the same exceptional
decision rate. Consider the strategy of trading three different sized
positions: an everyday small position, a medium sized position whert� one
has some conviction and thus can hold the trade over time, and the maximum

PRACTICAL APP LICATIONS 157 position, which is initiated only when the
lowest risk, most attractive opport unities occur. The strategy of weighting
trades is built around the goal of never being wrong when holding a
maximum position, thus boosting year-end results to a higher level than the
win-loss record. When the market is undervalued over the very short
tenn, in a situation where you do not have any convict ion as to where
value is moving other than in the shortest timef rame, only a small-sized
position should be enter ed. Thus, in a situation where a loss of capital
can occur from entering and holding a position and suffering exposure, and
being wrong, only a small-s ized position should be initiated. In other
words, with the smallest sized exposur e, you are paying $1.5 0 for something
that you think is going to $2.00, but which is only worth a dollar. A small
monetary loss of this nature cannot be held, since the participant does
not have time working in his favor if he is wrong. In this type of
situation, you must react to what the market is doing immedia tely when
taking a small loss, and not wait to consi der. When the market is
undervalued over the long and medium tenn , but perhaps overva lued over
the very short tenn, a medium-siz ed position should be entered on the buy
side. Thus, in a situation where you have enough time to get out without a
loss - since time is on your side - after entering and holding a position,
suffering exposure, and being wrong, a medium-sized position should be
initiated. In other words, with a medium-sized exposure, you are buying
something worth a dollar and paying a dollar for it. You have lower risk
than in a small position because you have both a longer period of time to
exit the trade and a larger profit potential. However, it is very important
to have a strong market understanding over both the short tenn and the
medium tenn before entering the market with a medium-siz ed position. When
the maIket is undervalued over the very long timef rame, undervalued over
the medium timef rame, and undervalued in the short timef rame, a maximum
position should be entered on the buy side. Thus, you should initia te a
maximum position only when you can enter the market, hold the position and
suffer exposur e, realize that you are wrong, and still get out with a
profit. In other words, with a maximum position, you should be buying some
thing for 50 cents that is worth a dollar. So long as you can continue to
hold the position, you cannot lose, assuming conditions remain unchanged.
Just because the market falls to 45 cents doesn't mean you have to sell,
nor do you as it goes to 55 cents. The participa nt can hold the position
through time with minimal risk, because price is far under value from a
long timef rame perspective. Indeed, the market may fall and the maximum
position can show a loss, but this should not be a major concern. It is a
loss you do not have to take, since maximum positions should be very long
timef rame trades initiated only after it is clear that the long timef rame
participants are finally entering the market opposite a long-tenn trend.

158 MARKETS AND MARKET LOGIC It should be noted that the window of time
where such an attractive opportunity occurs and you are trading very well
at the same time does not occur every day for most participants, but rather
only a few times a year. Don't Predict, Visualize Experienced traders and
investors summon the courage to take action, yet they never seem surprised
when the unexpected occurs and they are forced to retre at. This is because
they are prepared for the unexpected because they visualize all the
possibilities. It is very important to visualize the many ways in which the
market may unfold, rather than trying to forecast or predict how it will
unfold. With a market understanding, you can begin to visualize each possi
bility, and what each would indica te to you about the market and your
position. Visualizing the possible ways in which reality can unfold will mean
that the market will bring no surpri ses. Training yourself to visualize
also allows you to be prepared so that you can be early. Furthermore,
once you begin operating from reality, you cannot be surprised and can be
comf ortably early; expectations and hesitation no longer are unmanage able
probl ems. A sound trading strategy is one in which the participant trades
value and the marke t's current structure, not the last price. Str ucture is
the range of opportunity offe red to the marketpl ace whereupon values are
developed and rejected. The futures markets structure is illu strated by a
normal distribution profile. 9 In the final analys is, always consider
what your strategy really is. Are you continually buying rallies, or are
you buying breaks? Are you reacting to the promotional ability of price,
or are you reacting to an advertised opportunity? Learn how to be
indepcndcnt, think for your self, have conviction to put understanding into
action. Have the ability to think and the courage to apply your thinking
at the right time, namely, when you are early. When all else fails, it
might be helpful to try executing a series of trades with the express goal
of losing some capital. If this appro ach is success ful, simply do the
opposite with an equal serie s, and you should be on the road to cons istent
profits. 9 The CBOT Manual illustrates five basic struc tural types of
range development which can be used to classif y the present situation.
Knowing a market 's structur e-type is importa nt in that it can allow one to
identif y within a few hours the types of structure one is working with.
This moves the individual 's information from happenstance to

PRACTICAL APP LICATIONS 159 relative certainty after only a short period
of developed market activity. The autho r's have decided not to recreate
this data for reasons of space, but highly recommend it to those
interested in pursing an under standing of market-generate d activity.

15 CONCLUSIONS Y our ' 'net worth" really is your ability to function,

nothing more. Once a person has the ability to function, faith in himself
and his ability to handle all situations, and finally the discipline to do
what he has decided he must do, financial statements no longer hold so great
a meaning. Man moves into a mode where he is self-sufficient. At this point,
nothing material is of impor tance, simply because any goal worth working
toward will not be out of reach for long. Each of us must integrate this
into our thinking if we are to approach any market from a nonemotional,
consi stently logical manner. This refle ction is mentioned and addressed to
the many individuals who are attracted to financial markets because they
believe that making money as an independent trader or investor is relatively
easy and they equate money with success. Both of these beliefs are false.
Making money in business almost always entails substantial struggle.
Further, producing positive results in any business does not necessarily
yield success. Success is being happy; it results when you do what you want
to do, because you want to do it. When you are glad to be you, and you
have freedom and happiness, then and only then are you suc cessful.
Success is especially not found by making more money than the next person,
and it is a rare person with such an attitude who is able to both make money
and be happy. The participant who trades to make money as a means of
proving his worth to himself and others can expect many problems along
his journey. The authors have had the benefit of expos ure to many
individuals who have garnered media attention because of their conventional
success in financial markets. Yet true success lies in fulfilling your

PRACfICAL APPLICATIONS 161 potential - doing the best you can do, being the
best you can be. Thus, the autho rs would widen the class of "the best"
investors and traders beyond those who have made many millions. With such
a definition, the best investors and traders , as a class, have an attitude
of charity and generosity toward their fellow man. A jealous person has a
very hard time succeeding in a marketp lace, as he is always reacting
emotionally, rather than logically. The best partici pants tend not to be
affected when someone is performing better than they. Indeed, you should
be happy when your fellow man is doing well. This ties in with a dilemma:
on the one hand, strive to be glad to be who and what you are. On the
other hand, develop a humilit y and strive to control your ego. It is very
difficult to fulfill your potential as a trader if you have what might be
termed a large ego. In other words, don't have ego represent something
you are not and don't be afraid to be you. Either problem may end in
stubbornness and the inability to own up to a mistake. Anoth er outlook
which typifies the best trader invo lves the real ization that there always
will be those who have greater talents. He is not bothered by outwardly
competitive instincts, nor is he seeking a feeling of supremacy through his
market involvement. The best trader acknowledges that no one can be the best
in a qualitative sense, since being the best is a personal matter. Thus,
being the best is really a non-issue to the enlig htened participa nt. Rather
than competing against others , the best trade r channels his competitive
instincts inwardly. In other words, the superior outlook for a trader does
not include striving to be the best, but rather striving to be the best he
can be. Once an individual truly accepts this point, he can begin to view
markets in a greater context, and the importance of each decision is put
into proper perspective, and hopef ully decisions come easier and less
stressfully. The paradox of the financial world is that only when you are
glad to be you do you have freedom , happiness and the ability to attain
success easily. Management This book has introduced many concepts which fly
in the face of the current conventional wisdom on markets. Yet, it is not so
radical as one might think. What the authors advoc ate is little more
than thinking logically about markets and applying to trading and
investing the common management techniques used in all other business
endeavors.