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Mind Over Markets: Power Trading with Market Generated Information, Updated Edition


"Too often, developing traders focus on trying to predict markets before they have fully understood them. Mind Over Markets offers an unparalleled framework for understanding market movement and the processes that drive trends and reversals. Kudos to Jim Dalton for updating this classic text!"
—Brett N. Steenbarger, PhD, Clinical Associate Professor of Psychiatry and Behavioral Sciences, SUNY Upstate Medical University

Emerging over twenty-five years ago, Market Profile analysis continues to realize a strong following. The approach explains the underlying dynamics and structure of markets, identifies value areas, price rejection points, and measures the strength of buyers and sellers. Unlike more conventional forms of technical analysis, the Market Profile is an all-encompassing approach, and the Updated Edition of Mind Over Markets provides a solid understanding of it.

Since the original edition of this book was published, coauthors Dalton, Jones, and Dalton have continued to delve deeper into the application of auction theory to trading and investment decisions. Now they've returned to once again share their knowledge with you.

While containing the valuable insights and examples that made the first edition an essential resource on this topic, the Updated Edition contains a new concluding chapter that brings the "book learning" of the preceding chapters into the real world, where real money is won and lost during the market's endless fluctuation. The examples employed provide a clear context for the content—because the synthesis of the five stages of learning can only happen in practice. A new appendix is also included, which compares TPO with Volume Profiles.

JAMES F. DALTON has been a pioneer in the popularization of the Market Profile, a unique method of identifying trading/investment opportunities. He has been involved in the stock and futures markets for more than forty years. Currently a full-time trader, Jim advises two hedge funds and several trading firms. He is a discretionary trader and longtime proponent of employing the Market Profile to facilitate trading. Jim began his career in the investment industry as a broker with Merrill Lynch and Shearson Lehman. He is the coauthor of two books, the original edition of Mind Over Markets and Markets in Profile (Wiley).

ERIC T. JONES is a Senior Managing Director and Head of Advisory Solutions and Product Development at TIAA-CREF. His past experience includes more than twenty-five years of developing new investment products and programs designed to help individual investors more successfully achieve their financial goals and dreams. Eric is the coauthor of two other books on the financial markets, investments, and trading: Hedging Foreign Exchange and Markets in Profile (both from Wiley).

ROBERT B. DALTON is a partner at Karass Creative, a Seattle agency that bonds brands to tribes by telling stories that matter. For two decades, he has woven compelling campaigns across myriad media—from Addy-winning websites to short films and poetry—for a long list of artistic, nonprofit, and corporate clients ranging from Starbucks to TEDx. He is the coauthor of Markets in Profile (Wiley).

Preface xiii

Acknowledgments xvii

CHAPTER 1 Introduction 1

CHAPTER 2 Novice 7

Laying the Foundation 9

The Auction 9

Organizing the Day 10

Challenging the Rules 15

The Role of the Marketplace 16

Going with the Crowd 17

Introduction to Day Timeframe Structure 19

Normal Day 19

Dynamics 19

Structural Characteristics 21

Normal Variation of a Normal Day 21

Dynamics 21

Structural Characteristics 23

Trend Day 23

Dynamics 23

Structural Characteristics 23

Double-Distribution Trend Day 25

Dynamics 25

Structural Characteristics 25

Nontrend Day 27

Dynamics 27

Structural Characteristics 27

Neutral Day 27

Dynamics 27

Structural Characteristics 28

Day Type Summary 31

CHAPTER 3 Advanced Beginner 33

Building the Framework 34

The Big Picture: Market Structure, Trading Logic, and Time 34

A Synthesis: Structure, Time, and Logic 35

Ease of Learning 36

Amount of Information 36

Recognition Speed 37

Trade Location 37

Confidence Level 37

Summary 38

Evaluating Other Timeframe Control 38

Other Timeframe Control on the Extremes 40

Tails (or Extremes) 40

Range Extension 40

Other Timeframe Control in the Body of the Profile 40

TPO 41

Initiative versus Responsive Activity 45

Trending versus Bracketed Markets 49

Key Elements--A Brief Discussion 51

Trending Markets 54

Bracketed Markets 54

The Two Big Questions 56

CHAPTER 4 Competent 59

Doing the Trade 59

Section I 60

Day Timeframe Trading 60

Day Timeframe Directional Conviction 61

Opening Call 61

The Open 62

The Open as a Gauge of Market Conviction 63

Open-Drive 63

Open-Test-Drive 65

Open-Rejection-Reverse 68

Open-Auction 69

Open-Auction in Range 70

Open-Auction out of Range 71

Summary 73

Opening’s Relationship to Previous Day--Estimating Daily Range Potential 74

Open within Value--Acceptance 75

Rejection (Breakout) 79

Open outside of Value but within Range--Acceptance 80

Rejection (Breakout) 83

Open outside of Range--Acceptance 84

Rejection 85

Summary 85

April 13,1989 86

Crude Oil 87

S&P 500 87

Gold 90

Japanese Yen 92

Soybeans 92

Treasury Bonds 92

Summary 95

Day Timeframe Auction Rotations 96

Two-Timeframe Markets 97

One-Timeframe Markets 97

Using Auction Rotations to Evaluate Other Timeframe Control 97

Structure 99

Half-Hour Auctions 100

Extremes 100

Range Extension 101

Time 101

Identifying Timeframe Transition 102

December Swiss Franc, October 12, 1987 103

Y to E: One-Timeframe Buying 104

E: Time 104

Y to F: Auction Test 104

G: Transition Confirmation 104

E to H: One-Timeframe Selling 105

H: Auction Test 105

I: Transition Confirmation 105

H-J: One-Timeframe Buying 105

Summary 105

Auction Failures 105

Excess 110

Signs of Excess 111

The Rotation Factor 112

Monitoring the POC or Fairest Price 115

9:30 a.m. Figure 4.30 116

10:00 a.m. Figure 4.31 118

10:30 a.m. Figure 4.32 119

Noon Figure 4.33 119

2:00 p.m. Figure 4.34 119

The Close 120

Day Timeframe Visualization and Pattern Recognition 122

Short-Covering Rallies 123

Long-Liquidation Breaks 127

Summary of Short Covering and Long Liquidation 128

Ledges 129

Summary 130

High- and Low-Volume Areas 131

High-Volume Areas 131

Identifying High-Volume Levels 132

High-Volume Examples 134

Low-Volume Areas 138

Low-Volume Examples 140

Summary 144

Summary--Day Timeframe Trading 145

Section II 145

Long-Term Trading 145

Long-Term Directional Conviction 146

Attempted Direction: Which Way Is the Market Trying to Go? 146

Auction Rotations 147

Range Extension 147

Long-Term Excess 150

Island Days 152

Long-Term Tails 152

Gaps 155

Summary 155

Buying/Selling Composite Days 155

Summary 157

Directional Performance: Is the Market Doing a Good Job in its Attempts to Get There? 157

Volume 158

Evaluating Changes in Volume 158

Volume as a Measure of Directional Performance 158

Value-Area Placement 159

Evaluating Directional Performance through Combined Volume and Value-Area Placement 160

Value-Area Width 169

Summary: Long-Term Activity Record 171

Long-Term Auction Rotations 183

Brackets 183

Trade Location in a Bracketed Market 188

Rule 1: Monitor Market Direction and Location within the Current Bracket 189

Rule 2: Markets Generally Test the Bracket Extreme More Than Once 190

Rule 3: Markets Fluctuate within Bracketed Regions 190

Rule 4: Monitor Activity Near the Bracket Extremes for Acceptance/Rejection 192

Transition: Bracket to Trend 192

Trends 193

Trade Location in a Trending Market 193

Monitoring Trends for Continuation 196

Transition: Trend to Bracket 197

Detailed Analysis of a Developing Market 201

Bracket Reference Points 201

Region A (Figure 4.87) 203

Region B (Figure 4.88) 205

Region C (Figure 4.89) 207

Region D (Figure 4.90) 208

Long-Term Auction Failures 210

Long-Term Short Covering and Long Liquidation 214

Applications 224

Corrective Action 225

The Function of Corrective Action 226

Summary 228

Long-Term Profiles 228

Using Long-Term Profiles 229

The Long-Term Profile in Action 229

Region A (Figures 4.98 and 4.99) 231

Region B (Figures 4.100 and 4.101) 235

Summary 238

Special Situations 238

3 to I Days 239

Neutral-Extreme Days 241

The Value-Area Rule 244

Summary 246

Spikes 247

Acceptance versus Rejection 247

Openings within the Spike 247

Openings outside the Spike 249

Bullish Openings 249

Bearish Openings 252

Spike Reference Points 252

Balance-Area Breakouts 252

Gaps 260

Day Timeframe Significance of Gaps 260

Summary 265

Markets to Stay Out Of 265

Nontrend Days 266

Nonconviction Days 266

Long-Term Nontrend Markets 267

News-Influenced Markets 269

Summary 269

News 269

Summary 274

Beyond the Competent Trader 275

CHAPTER 5 Proficient 277

Self-Understanding: Becoming a Successful Trader 279

Self-Observation 281

The Whole-Brained Trader 282

The Left Hemisphere 283

The Right Hemisphere 283

Combining the Two Hemispheres 283

Strategy 284

A Business Strategy 285

Capital 285

Location 286

Timing 286

Information 287

Know Your Competition 287

Know Yourself 288

Consistent, Daily Execution 288

Inventory 288

Risk 289

Goals 290

Record Keeping and Performance 290

Dedication 290

Applications 291

Summary 292

CHAPTER 6 The Expert Trader 295

CHAPTER 7 Experience 297

Set Aside Your Expectations 297

Mind over Markets in Profile 298

Market-Understanding and Self-Understanding 300

Perfect Practice Makes Perfect 300

Blinded by Price 300

Be Prepared 301

Perspective 302

Overnight Inventory 305

Gaps Can Be Gold 307

Gaining an Edge 308

The Fairest Price Revealed 309

Thinking Statistically 311

The Trader’s Dilemma 311

The Most Important Omission from the First Printing in 1990 312

Emotional Markets 313

A Landscape View of the Market 314

Personal Evolution 315

Hierarchy of Information 316

Timeframe Control--Who Is Dominating the Current Session? 317

Markets Are Visual 318

Destination Trades 319

The Opening 319

Trends 320

Daily Perspective 322

Cognitive Dissonance 322

Imagination 325

False Certainty 326

Anomalies 326

Market Logic 328

We Are All Day Traders 329

APPENDIX 1 Value-Area Calculation 331

Volume Value-Area Calculation 331

TPO Value-Area Calculation 332

APPENDIX II TPO versus Volume Profiles 335

Single Price Level Distortions 336

End of Day Total Volume versus Ongoing

Volume throughout the Day 337

Anomalies 337

Too Focused on Volume 339

Conclusion 339

Suggested Readings 341

About the Authors 343

Index 345