radiating throughout the audience, as each participantreadies their pencil and paper to take careful notes on the four differenttypes of openings—notes that will be concrete and easily memorized. (After all, isn’t that why you attended the seminar?) While these notes willappear absolute to many, they are merely a starting point.Ask.com defines cognition with a lot of descriptive words and phrases.Among them are: “a very broad term, which is not easy to describe,” and“mechanisms involved in such process in human beings as perception, attention, learning, thought, concept formation, reading, problem solving,and the development of such behavior.” True cognitive learning only begins when you realize that you have to transcend the limitations of fixeddefinitions in order to discover how markets really operate. Each openinghas to be placed within a much broader context. On several occasions, wehave used the phrase “immersed in the markets.” This is just another wayof saying that you have to be deeply, personally involved in the marketsbefore you can begin to discover just how much of your creative energyis required before you can begin to travel down the path toward being anexpert trader.Now, back to those “notes.”The Open-Drive is the highest-confidence opening; the first example(Figure 8.15) shows the Open-Drive followed by a sharp downward trendthat continued throughout the entire day, gapping lower on the followingday. Now let’s review the same Open-Drive in different contexts. Figure8.16 shows the same day illustrated in Figure 8.15, but with more perspective provided; we’ve added the day prior, which was an inside day (itsentire range contained within the range of the previous day). As we havestated, inside days are a form of balance, and when a market comes out ofbalance it is likely to attract multiple timeframes, which adds to the resulting volatility. In this instance, the market had already turned down (notshown), so the Open-Drive in question was also with the current trend.Figure 8.17 also illustrates an Open-Drive. However, the circumstances are somewhat different. In Figure 8.16, the auction had alreadyturned down and the opening was with the intermediate-term trend; inFigure 8.17, the long-term auction was still up (not shown) and so theOpen-Drive occurred against the intermediate-term trend, and within theprior day’s range, which means that it is still within balance and unlikely to
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Arrow to right of theletter N representsthe close.Market gapslower.BBB
FIGURE 8.15 Open-Drive in the S&P 500, daily proﬁle.Source: Copyright ľ2006 CQG, Inc. All rights reserved worldwide. www.cqg.com.
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BBBBBBBBBBBCBCBCBCCCCCCCCCCCCGCGHCGHICDFGHICDFGIJKCDFGIJKDFKDEFK
Open-Drive takesplace out of balance
FIGURE 8.16 Open-Drive with the intermediate-trend in the S&P 500, dailyproﬁle.Source: Copyright ľ2006 CQG, Inc. All rights reserved worldwide. www.cqg.com.
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attract as much attention. The context for both examples is quite different,resulting in different expectations going into the following day for each.To reiterate, Figure 8.16 displays an Open-Drive with the trend and out ofbalance to the downside, and as a result, large downward movement inboth price and value occur; the Figure 8.17 Open-Drive is against the majorauction and within balance, resulting in only moderate changes in price,with value overlapping to slightly lower.By definition, an Open-Drive starts out with high confidence, and ifthat confidence continues throughout the day, you would expect to seethe profile elongate, with value being gradually pulled along with price.Remember, price is the fastest moving element, and value develops muchmore slowly. On the day following an Open-Drive, you would expect to seethe market open outside of value in the direction of the Open-Drive, or atleast value beginning to build outside of the previous day’s value area.When you start to see developments that contradict the descriptionsabove, you should quickly realize that the confidence level is declining,and if your day trade is in the same direction as the Open-Drive, your riskis increasing along with the odds of a reversal. If the market continuesas expected, on the other hand, then maintain your position and let themarket work for you, monitoring activity for signs that the initial optimisminherent in the Open-Drive is beginning to wane, which would suggest thatyou should exit your trade; your goal should be to become proficient atexiting trades of your own free volition, rather than waiting for stops totake you out. This practice will boost your confidence level (not to mentionyour bank account).
Open-Test-DriveAn Open-Test-Drive is similar to the Open-Drive, except that the marketlacks the initial confidence necessary to drive immediately following theopening bell. During this type of opening, the market generally opens andtests beyond a known reference point—such as a previous high or low—tomake sure there is no business to be done in that direction. The marketthen reverses and quickly auctions back through the opening; a failed testin one direction followed by a strong reversal often secures one of the extremes for the day.In the late 1980s, when I was responsible for an institutional tradingdesk, it was quite common to receive large institutional orders with instructions to wait 15 minutes before beginning to execute the trade—theinstitution didn’t want to be embarrassed if there was substantial businessto be done in the direction opposite their order. For example, if they wereselling, they didn’t want to sell at $40 per share if the market was going toauction quickly to $42 per share. An Open-Test-Drive is the second most
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BOpen-DriveBBBBBEBEBEBECECECECEFCDEFLNCDEFLNCDEFKLMNCDEFHKLMNCDEFHJKLMNCDEFHJKLMCDFHIJKLCDFHIJKCDFGHICDFGHICDFGHICFG
Open-Drive takesplace withinprior's day range,market remains inbalance
FIGURE 8.17 Open-Drive against the intermediate-term trend in the S&P 500,daily proﬁle.Source: Copyright ľ 2006 CQG, Inc. All rights reserved worldwide. www.cqg.com.
reliable type of opening. Once the market has tested in the opposite direction and found strong opposite activity, the odds are high that the initialextreme will not be revisited for the remainder of the day.Figure 8.18 illustrates an Open-Test-Drive. While we didn’t show it inthe example, the upward test auctioned up to the previous day’s high,where sellers quickly stepped in and sold with confidence. The analysis
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Test
Opening
FIGURE 8.18 Open-Test-Drive type of opening, daily proﬁle.Source: Copyright ľ 2006 CQG, Inc. All rights reserved worldwide. www.cqg.com.
following the “Drive” portion of an Open-Test-Drive is exactly the sameas discussed for the Open-Drive: you would expect to see elongation,lower value and price, and so on. Once again, the contradictions—likefootnotes to an accounting document—are where the real information ishidden.Training yourself to constantly think in terms of market confidence is ameaningful way to help to decide when to enter and exit trades. For example, while the Open-Test Drive is a high-confidence opening, the confidenceis not quite as high as an Open-Drive, which should lead you to adjust yourexpectations accordingly.
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Open-Rejection-ReverseThe Open-Rejection-Reverse is characterized by a market that opens,trades in one direction and then meets opposite activity strong enough toreverse the auction and drive it back through the opening range. The thinking process following this kind of open should be along the same lines aswhat we discussed before: Ask yourself how much confidence is embodiedby the market’s early auctions. The three types of openings we have described thus far differ in the amount of confidence that surrounds them.The weaker the opening, the greater the odds that price auctions backand forth through both the opening range and the early morning highs andlows.When a market finally decides to auction directionally, we are alwaystrying to determine how long to stay with the trade—a decision that shouldbe based around how much confidence the market is exhibiting in the directional move. The opening type is simply one factor in assessing marketconfidence. Probably the most used and least reliable confidence indicatoris price.Figure 8.19 shows the opening followed by a downward auction that isrejected, as evidenced by the single print buying tail in y period. The pricesthat were being offered as the market made a new auction low were quicklyaccepted by the responsive buyer, who believed that prices were too lowand represented a good deal. Had the market auctioned at these lowerprices in two consecutive time periods, instead of only one (as shown inthe box), the market would have shown a lesser degree of confidence. Thefast rejection reveals the fact that buyers had confidence, at least in theearly going. The market then reversed and auctioned higher—thus the label “Open-Rejection-Reverse.”The confidence at the lower extreme—because the direction wasn’t determined from the opening bell—would be classified as “lower.” This simply means that the possibility of the market reversing, later in the day, hasto be given serious consideration. Nothing should be viewed in isolation,however, as there are many factors that help us judge the strength of anauction. We’ve already noted factors such as developing value area placement, volume associated with the auction, and elongated profile structure,which at a glance reveals a higher degree of confidence than a profile thathas begun to fatten.The example in Figure 8.20 demonstrates another sign of auction confidence, which is best explained visually.Once the rejection occurred in y period, no subsequent half-hour timeperiod trades below the previous period’s lowest price. We call this typeof activity a one-way auction, or an auction that is one-timeframing. Acostly error traders make is fading a one-timeframing auction. Even if
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Auctionslower
GHGHFGHFGEFGEFGEFBDEFBCDEFBCDBCDBCDzABCDzAByzAByzAByzAByzAyzAyzyzyzyzyyyy
Reverses
Rejection
FIGURE 8.19 Open-Rejection-Reverse type of opening, daily proﬁle.Source: Copyright ľ 2006 CQG, Inc. All rights reserved worldwide. www.cqg.com.
the auction is not supported by volume, or any number of reasons, youare usually better off not stepping in the way of a market that is on themarch, though gradually; there will be a better time and price for yourtrade.
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yyyyyyyyyyyyy
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FIGURE 8.20 One-timeframing auction following an Open-Rejection-Reverseopening, daily split proﬁle.Source: Copyright ľ 2006 CQG, Inc. All rights reserved worldwide. www.cqg.com.
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Open-AuctionOpen-Auction activity initially reflects a market with no conviction at all.The market opens and appears to randomly auction above and below theopening range. In reality, the conviction reflected by the Open-Auctionlargely depends on where the market opens relative to the previous day.An Open-Auction that occurs inside the previous day’s range, for example,conveys a much different opinion regarding potential day-timeframe development than an Open-Auction that occurs outside that range. In general,if a market opens and auctions within the previous day’s value area andrange, then a nonconvictional day will usually develop. The same opening occurring outside yesterday’s range, however, demonstrates a market that is out of balance relative to the previous day, which greatly increases the odds of a dramatic price move in either direction. If the marketquickly returns to the previous day’s range and reenters the value area, theodds are good that the market will continue on to the opposite extreme ofthat day’s range. Failure to return to yesterday’s range increases the oddsof a meaningful, directional move in the direction of the out-of-balanceopening.Figure 8.21 demonstrates an Open-Auction, with price trading bothabove and below the opening for each of the first five periods. When youhear people talk about successful trading requiring patience, that principleis never more applicable in the day timeframe than after an Open-Auction.Whether the market is in or out of balance, there is no reason for a daytimeframe trader to trade during the first five periods of an Open-Auctionday. When the market lacks conviction for that long, the odds favor limitedrange development for the remainder of the day, which translates to limited opportunities. (Mind over Markets covers day-time directional development relative to these openings in much greater detail than space allowsin this book.)In sum, the lack of short-term conviction surrounding the openingrange suggests that day traders should wait patiently until the market arrives at a directional consensus.
DAY TRADER’S CHECKLISTAs was stated earlier, every experienced trader has his or her own system of checks and balances. The following checklist is designed to getyou further down the road to developing your own personal preparationprocess.
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First 5 periodscontinually above andbelow the opening
Open
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FIGURE 8.21 Open-Auction type of opening.Source: Copyright ľ 2006 CQG, Inc. All rights reserved worldwide. www.cqg.com.✔ Review yesterday’s profile for clues as to what to expect today. Make
a note of possible trades, based on varying developments.✔ Review the overnight markets for any unusual price movement or
early indications for the day.✔ Compare the expected opening to the previous day. Is it within or out-
side the previous day’s range? Value area? To the upside or downside?✔ Relative to the expected opening, identify three references points,
both above and below the expected opening. These could be the
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previous day’s high and low, weekly high or low, the top and bottomof the previous day’s value area, or the high or low of a recent tradingrange. (There is no set answer—you should be guided by your past observations of where price slowed or accelerated, as well as past areasof heavy or light volume.)✔ Note what kind of opening is occurring, as well as what you’d want tosee in order to quickly judge the resulting directional confidence.✔ Note whether or not there is clear attempted direction, and whetherthat activity is supported by volume.✔ Does the market appear to be within balance or out of balance?✔ Visualize the remainder of the day. Will it look elongated, squat, fairlynormal like a bell-shaped curve, and the like. Note any unusual shapesor patterns that may suggest something unexpected is happening.✔ Estimate how much effort is being expended to move price directionally, and note what that suggests about the inventory conditions ofyour competitors—too long, too short, above water, below water, etc.✔ If there is a major news announcement scheduled, be aware that therecould be unexpected volatility. Let the market provide short-term interpretation of resulting activity by observing developing structure.Unless the day-timeframe structure is extremely strong and unlikelyto be reversed by such an announcement, we recommend that daytraders be flat in front of significant numbers.Let’s examine three different markets, beginning with the opening bell.This discussion both summarizes and abbreviates this checklist.
Example 1The first example (see Figure 8.22) enables us to view two high-confidenceopenings occurring within different contexts—one takes price outside ofbalance and one results in price maintaining equilibrium. To recap, whenprice moves outside of balance, the odds are that there will be more volatility and a greater range than when price remains within balance. Here’sanother way to think about this: The status quo is maintained when themarket remains within balance, but the status quo has changed once themarket leaves balance, which generally results in additional timeframesjoining the fray.We labeled the different types of openings to facilitate their description. But please remember that the labels are far less important than theamount of confidence that is indicated by each opening. Day 1 shows highconfidence, selling from the opening bell with price rapidly auctioning below both the value area and the range for the prior day. It doesn’t take longfor you to visualize lower value for Day 1; you should quickly short this
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Day 1 highconfidenceopening
BHBHBGHBGHIBGHIBGHIBFGHIBFGHIBFGHIBDFGIJBDFGIJBDEFGIJKLNBCDEFIJKLNBCDEFIJKLNBCDEFIJKLNBCDEFIJKLNBCDEJKLNBCEKLMNBCEKLMNBCEKLMNCEKLMNELMNELMNMMM
Out of balancego withmarket
b formationlong liquidationpatient buyers
Merrill LynchMER
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FIGURE 8.22 Example 1: Two high conﬁdence openings occurring in diﬀerentcontexts.Source: Copyright ľ 2006 CQG, Inc. All rights reserved worldwide. www.cqg.com.
market—go with the open—once price moves below the previous day’srange, with the expectation that value will be pulled down to price. Youshould also track volume to assure yourself that lower prices are attracting additional activity.The b pattern begins to form in the fifth time period of Day 1, and continues to develop for the remainder of the day. The expected market structure for a day with early high confidence would be an elongated profileshape; as soon as it becomes clear that the expected is not going to happen,it’s time to exit a short position—even if the market continues lower, theodds are building against you. Mechanically, this was a simple day trade,
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but the emotional ramification of such a trade is far more complex. Youhad to act quickly, you had to sell something cheaper than you could havesold it for at any time during the prior day, and there was nothing to really measure your risk against. A different mindset would see risk as lowdue to all the selling that is forcing prices lower. But your mind shouldhave awakened when the market failed to go much lower relative to thefifth time period—time to cover. The goal is to exit trades based upon market structure, not based upon price; your observations, not a stop. When astop is triggered, the market is responsible for the outcome. When you exita trade on deteriorating structure, then you are clearly in charge.The b pattern that developed on Day 1 tells us that the odds are highthat we’ll have to trade to the upside at some point tomorrow. The shortevidence says that the sellers on this day were not new sellers, but rathershort term long stock liquidators. The b patterns provides evidence that theselling was being accumulated by a longer timeframe that expected to takenew longs home overnight.Day 2 also had a high-confidence opening, with the major difference being that price remained within the previous day’s value area, which demonstrates a market without much confidence. The strong upward opening thatwas searching for sellers found those sellers near the opening of Day 1,which was just below the bottom of that day’s value area. Our upper references should have been: (1) the previous day’s low; (2) the previous day’sopening; and (3) the low of the previous day’s value area. There was neverany price acceptance at any of these reference points—the market did notspend enough time there to reestablish value. Because Day 1 had a widerange, indicating acceptance, and Day 2 fails to auction above Day’s 1 high,the expectation would be for a narrow, range-bound day. By periods 6 and7 (G and H), it appears that this is, in fact, a narrow balancing day with limited opportunities. The key to developing this insight early is to put yourselfin the buyers’ shoes, examining their mindset.Figure 8.23 demonstrates Day 2 in its entirety—it remained within therange established by its opening period, which signaled that the odds ofany real change were low. You should have quickly visualized that thismarket was unlikely to do anything meaningful over the rest of this day;there was never any real, new long-term buying, as the combination ofshort covering and new long-term buying would have caused the profile toelongate.
Example 2The day that preceded Day 1 in Figure 8.24 exhibits unusual width inthe lower portion of the profile (circled area). By now we know that the
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As the day continued
FIGURE 8.23 Example 1: Day 2 daily and split proﬁles.Source: Copyright ľ 2006 CQG, Inc. All rights reserved worldwide. www.cqg.com.
odds of revisiting a prominent price level like this are above average—thewider the line of TPOs, the greater the approximate volume. The oddsof price returning to such a lever are even greater on days that exhibit
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Low-confidenceopeningopening
Notice theunusual width.
NNNNNNNNNBNBNBMNBKMNBKMNBKMNBCKMNBCKMNBCKMBCKMBCDKMBCDKLMBCDKLMBCDKLMBCDFKLMBDFGKLMDFGKLMDEFGKLMDEFGJKLMDEFGHJKLMDEFGHJKLMDEGHJKDEGHJKDEGHJKDEGHIJDEHIJDHIJDIJDIJIJJJJ
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First hour (B & C)above and belowthe openingseveral times,confidience lowEEEEEEEEEE
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FIGURE 8.24 Example 2: Day with a low conﬁdence opening.Source: Copyright ľ 2006 CQG, Inc. All rights reserved worldwide. www.cqg.com.
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low confidence, as the market is effectively seeking guidance, which canbe provided by price levels that have drawn attention in the past. Another of our top reference points for Day 1 would be the previous day’shigh.Day 1 opened and traded both above and below the opening, as wellas above the previous day’s high, in the first period. C period continued this low-confidence action, suggesting that short-term traders shouldbe patient and wait to act until the market decides which way it’s going to trade. The failure to find acceptance (over time) above the previous day’s high tells us that this day is not going to build value out ofbalance to the upside; the market auctioned above the previous day’shigh and discovered that activity was cut off—higher prices dampenedactivity.At this point, the market can be expected to explore lower. As you cansee, lower prices attracted additional sellers instead of cutting off activity,therefore the market needs to continue lower until it can lure in buyers andreturn to balance. Notice that in G period the downward auction accelerated quickly, reaching the area circled and labeled “unusual width.” Therewas never any reason for a day trader to exit this trade until the close, asthe profile remained elongated and price again accelerated as the previousday’s low was taken out.One last note: once an auction looks above a previous high and fails,or looks below a previous low and fails, you should immediately recognizethe possibility of an auction to the opposite extreme.Figure 8.25 simply allows you to see the finished, collapsed profile ofthe day we just discussed.
Example 3We’re concluding Chapter 8 with the example shown in Figure 8.26 becauseit addresses the essence of day trading: What is the market attempting todo, and what grade does it get for its effort?In Example 3, the market opens with low confidence. However, lowerprice gets accepted in B and C periods, which increases the odds that valuewill also migrate lower. Periods D and E extend the auction to the downside, giving the impression that this will continue to be a weak day. A rallyin G period carries the auction back to the C period high, where you willnotice that it also trades back into the previous day’s range. The marketonce again sells off, but doesn’t even come close to the early morning low.On days like this the market can appear to be weak, trapping you unlessyou continually ask yourself, “What is the market getting for its effort?”In this case, while the market has continually sold off, the net effect isvery little change, and by the end of the day price actually closes higher.
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