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Market auction or How to form a proper understanding of market structure

Portal Forex trader 29.08.2019 at 09:57

Forex trading strategies, expert advisors, indicators, video training trade

After reading this article, the attentive reader will understand when to buy low and sell high and when to buy high and sell low. Speech will go today about the Phases of the market and the Market auction.

There is a perception that trading is an auction where buyers and sellers operate according to certain rules. This opinion comes from game theory, based on numerous and quite complex formulas and ad factum accepted in the investment community. How things are in reality, let's deal!

Before you continue reading, you should read the previous materials on the subject:

Horizontal volumes on Forex market Profile Ninja Trader Terminal And than we are worse?

the Fact that for us the theory of auction is the dark forest. Even even worse — over trees (prices) we cannot see the forest (the auction).

the Objective of this article is to turn in your mind the trees in the forest, i.e. I want you first learned to see the auction (or rather, its phase), then the current position of the quotes in this auction, and only then began preparations for opening of the transaction. This is the ideal.

even if your purpose on the Forex to get the adrenaline pumping, like in a casino (red-black, Buy-Sell), the understanding phase of the auction will increase the chances to win big, or will help you not to lose your Deposit in one go, which is also important, as delaying the unloading process increases the chances to win big.

So the knowledge you get while reading this article is worth its weight in gold. But if knowledge is gold, and the examples are only for the instrument GC (gold futures on COMEX).

I'll handle stock market data trading volumes. About where to steal free volume quote in the terminal Ninja Trader, – it is written here. Paid indicators for Metatrader 4 is described in this article. If you are not able (do not want to believe it) or desire (which is also weird) to buy bulk quotes, always useful indicators of market profile based on tick chart. It's not quite the exchange volume, but for the analysis of daily time-frames more or less amiss.

I'll use the terminal SBProX. Despite the fact that I'm trading in MT, this terminal allows you to analyze what does not allow ordinary MT4. About how to configure the terminal, I will tell in the next article on this subject, which will show you how to work with vertical and horizontal volumes in different phases of the market. The purpose of this material is the explanation of market structure and General principles of its functioning.

the Theory of auction – based understanding of market processes

the Story of the balance of supply and demand we all learned in high school. So, this is the starting axiom. Deals are made only when there are two sides: buyers and sellers. And both sides prefer to work in comfortable prices. Therefore, a normal auction has a Gaussian distribution, i.e. the view of the bell-shaped curve (Fig. 1).

Fig. 1. Curve.

let's make some magic. Deploy the image in the vertical plane, we add data on the amount of trades and get a normal exchange profile. It's a weekly chart of gold cluster (Fig. 2). I think everyone will see that there are many similarities between the Gaussian curve and distribution of liquidity. Some of the clusters (highlighted in blue rectangles) coincide almost 100%. Others differ, but almost every week the cluster, you can identify areas of the normal distribution, i.e., the area of balance, where the basic number of transactions.

Fig. 2. Examples of classical normal distribution clustered on the weekly chart of gold.

the Normal distribution implies that 68% of the data (transactions in our case) are located between the middle, i.e. the most frequently occurring data, and +/-1 standard deviation. And 95% of the data (transactions) are in the zone of +/-2 standard deviations from the middle (Fig.3).

Fig. 3. Normal distribution of data.

Returning to the chart of gold (Fig. 2), we see that the largest number of transactions takes place just in the area between -2 and +2 deflection in those clusters where there is full compliance with the theoretical distribution.

in Other words, the auction time period is formed from the middle (ROS, the most traded price) and deviations from the average. When we see this profile on senior time frames, we see Junior on a flat, i.e. balance.

the Concept of balance is one of the main in the theory of auction. In the framework of the balance (if broadly, the value zone, i.e. 95% of liquidity) price goes from most expensive to buy the cheapest sale. Yes. So.

the Cost falls until the moment of wishing to sell, and growing until the moment of wishing to buy. This is the main law of the auction.

on this Basis, it becomes clear why the balance of sales at the Delta* collected at the bottom of the range and buying at the top. This is the General principle. If somewhere at the bottom there are no sellers, then the buyer begins to search for the seller at a higher price. After all, as we remember, every transaction has two sides, i.e. without one of the parties of transactions. If somewhere at the bottom appears the seller and no buyer, the sellers push the bottom, and starts the imbalance (momentum), i.e. finding a buyer in the form of avalanche-like collapse of the value of the asset. And the reverse situation: if the upper limit of the balance, appear willing to buy, and wishing to sell no longer is, then there is the explosive growth of the asset value, i.e., the momentum (imbalance).

* Delta is the difference between buyers and sellers. There are two ways to identify the initiator of the transaction. The first method is the most correct, because exchange simply provides that a transaction initiated by buyer and the other seller. Chicago Mercantile exchange (CME) provides data on the initiators of the transaction. But the new York stock exchange (NYSE) did not provide such data, so the Delta is considered in the direction of the tick. Remember that buying more expensive, while sales of cheaper by law auction. So, tick up – Delta in the Bay, down tick – Delta in the cell. It's simple.

This time Delta gold chart with the volume profile on Friday 7 June 2019 (Fig. 4) after the disastrous non-farm payrolls. I basically just allocated the balance after the impulse in a small time frame. Profile of the price Delta and price chart. It is clearly seen that near the lower limit of the new zone value of the day (1344,6-1350,2 on Globex), we determined the distribution of liquidity, similar to normal, and with about 90% of the liquidity, more sellers (we don't care, sellers or fixes/foot buyers). In lo each cluster, the preponderance of sellers. And the same at the upper boundary of balance — there are more buyers.

Fig. 4. The law of auctions: the market goes from most expensive to buy the cheapest sale for example H1 Delta graphics GC 7/06/2019. Delta bye – positive values are blue; the Delta in sell – negative values in red.

figure 5 is identical to the figure 4, but instead of the volume profile I have included a profile of the Delta and is Delta graphics cluster included cluster volume chart. All similar: the overall profile of the balance sheet shows the accumulation of shorts at the bottom and purchase at the top. But remember about the self-similarity of the market, i.e. its fractal dimensions.

Fig. 5. The law of auctions: the market goes from most expensive to buy the cheapest sale for example H1 Delta graphics GC 7/06/2019.

With expensive purchases and cheap sales balance figured out, but what to do with the fact that in Fig. 4 is well seen aggressive buying (1344), and denominated sales in the range 1349,2-1350,2? In Fig. 5 in the Delta profile, these companions also left a trail of disturbing the harmony of the distribution of sellers at the bottom and buyers at the top.

In fact, it's very simple. Here's a chart M5 of the same piece, which shows that buying is coming on top of microbalance, and selling on bottoms (Fig. 6). Thus, the principle is observed. Just we must not forget the self-similarity of the market on different TF.

Fig. 6. The law of auction. Gc M 5. Delta graph.

now the tricky question: you have often sold the bottom and bought at the very high, i.e. tried to work on a breakout? I know that often, very often. And all because they didn't know the auction market structure and impinge on the continuation of the balance, while the wanted pulse.

Many of these deals you one way or another were taken at 0, if traded without a stop and waited for a refund. Sometimes, after you've smoked three packs of cigarettes, drank all the coffee, broken keyboard and sent the people around you away, the price went where it should, ie passed to boost. But it was also a deal when you sold high / bought low (as you thought), and the return was not. And burned deposits, as the poplar fluff. That is very fast.

And no coffee, no cigarettes didn't help to wait for the return: through a gray smoke on the screen was melting hard-earned dollars, and then comes a margin call. Because I didn't know the auction market structure and fell to the imbalance (Fig.7).

Fig. 7. The emotional state of a trader after the occurrence of a margin call.

Upset? Recalled unpleasant moments? Then we move on to the next section. But before that, answer the following questions:

What is the auction and what is its main law? Why balance work well fan of strategy?

Said? Then go further, because the most important part begins.

the Structure of the auction,

I think you already understand that the balance is trade in flat and want to find the imbalance, when the distribution becomes abnormal, and it is offset in some direction.

I am Sure that you already have a gut feeling that the market can be divided into two parts: the balance sheet (flat) and imbalance (momentum, trend). The history is clearly seen as one enters another. But how to find transitions? It is necessary to complicate the scheme, what we will do now. But before that, again on the balance.

In any phase of the market it is possible to allocate the balance or momentum on smaller timeframe. Even if the value changes rapidly and it is now the most aggressive part of the pulse (as told to volnovikami: "the third wave the third wave"), the second chart it is possible to allocate the balance for 10-15 seconds. Balance is the most traded part of the market profile. Therefore, the analysis quotes need to start with higher timeframes and descend to the youngest. And analysis is necessary in order to make a decision about entering (or not entering) into a transaction, as well as its potential. Understanding that on the daily chart balance, and on the hourly chart starts an imbalance in the daily balance, and helps a lot in trade from the borders. We can go now.

the Market is an auction with a 4-phase structure: pulse – fix (response, climax) – balance – impulse (scrapping or continuing the previous trend) (Fig.8).

Fig. 8. 4-phase structure of market of the auction.

Remember that. Impulse – fix (response) – balance momentum. And once again: boost – fix – balance – impulse. Enough? I don't think. But if you repeat like a mantra, just a couple of weeks everything will fall into place, and the world (i.e. the market) will never be the same.

the Algorithm for identifying the market phase

I Described the concept means that the start and end points of the calculation is the impulse. Therefore, to analyze the current activity, find the latest impulse on the senior TF. Usually this is a daily TF. For a full understanding of the market phase of the auction should analyze the vertical and horizontal accumulation volume, i.e. the analysis of statistical regularities. Details I'll tell in the next article. Here the main emphasis I do on the very logic of its consideration of market auction using the momentum, fix, balance and momentum.

1. Pulse

the Pulse is characterized by stepwise accumulation of liquidity, rapid unidirectional change of prices, as well as increased by 25-40% the sentinel and the daily turnover relative to those in the balance. I.e., the impulse is the change in the value zone on the corresponding timeframe.

Right now gold is in the phase of the pulse. The sentry cluster chart of gold (Fig. 9) with the fluorescent profiles in the middle of June 2019. The distribution of liquidity every day is not normal (look at the daily clusters), i.e. in the range of day liquidity (core, balance sheets) are placed unevenly. Each new balance is higher than the previous day. Liquidity is quickly (few hours) in the plane. A normal distribution is violated on a larger timeframe and there is only a few hours in the moment.

the Current pulse began may 30. I'm not apart of the fact that the opening of a new two-month futures contract, simply indicate that in moments of change contracts, or almost right after change of contracts, the probability of a new trend higher. To 1291,6-1294 it was possible to assume that the impact on the balance sheet. But the close of the day (it was Thursday) above 1291,6-1294 (previous resistance band), and work on Friday on the new levels 1301,8-1303,8 already alluded to the fact that it was time to join. Output in 1307,6-1311,6 at HIGH speeds, confirmed by Delta, finally marked the impetus for the careful. Latest ranges of net purchases: 1318,8-1223,8 (can be divided into two zones, but it is not critical here) and 1326,6-1331,6. First day balance happened above 1324 on Tuesday. Thus, for 5 sessions, gold rose by $ 80, then began the fix.

Fig. 9. The phase of the pulse at the gold. Hourly chart with daily clusters.

2. Fix (the climax)

Fix – this is the ejection volume vs of the pulse. In the classical analysis is that the correction, expected by many.

How to determine the fix?

In the phase of the horizontal momentum of any volume (i.e., any storage, any balance in lower TF) is directed only in one direction: in our case, is a clear uptrend.

the First horizontal volume on the analyzed time frame (TF), positioned in the opposite direction with the breakdown of the first supports in momentum, is fixed. Horizontal structures (clusters) may be irrelevant, but the vertical one increases relative to the pulse. If the pulse phase of each extension quotes is 50-60 thousand turnover per hour, fix an hour you can throw 70-90 thousand Well and has close to 50 thousand

in Other words, any response to the ejected volume in the market AGAINST the main trend is fixed to the corresponding TF (or lower TF).

In our case, we see a day of balance in 1326,6-1331,6. The next day there is an expansion of quotes in a northerly direction, but in the range of 1347-1348,6 (Fig. 10), which came without much struggle (i.e., very sharp), threw small amounts and had a first obvious fix, which returned a quote directly to 1326,6-1331,6. Through session fix confirmed by slightly extending the price, but gaining volumes in the same range 1347-1348,6. Volumes in these points was the maximum. The smart came out in 1349,4-1351,8. It is also worth noting that on Wednesday struck two local hourly support 1338-1340 and 1340,8-1342,8 that are part of the momentum would hold. The second range is resisted in the balance Thursday. Monday 10 June is not only hourly, but the daily liquidity position as fixed as Friday closed above 1340 and opened actually in the area of 1330.

Fig. 10. General view of the fix. Hourly chart with daily clusters.

After the fix, there's always a balance. It has a more or less continuous, depending on the market phase for the auction timeframe.

3. Balance

After the fix, there comes a balance in the considered TF. In our case, we can easily determine the boundaries of the medium-term balance. Balance is the accumulation of the volume within certain limits after the fix.

the Upper range of the balance is the liquidity of fixes, and the lower recent purchases pushed the quote to the fixes. Ie more likely to expect the formation of a balance in the range 1316-1347 with taps not below and not above 1318 1352 (Fig. 11).

Fig. 11. The beginning of the formation of the balance after the fix. Hourly chart with daily clusters.

Repeat the idea, voiced at the beginning of the section: analysis of the quotes it is necessary to start from higher TF and go down to Junior. Term analysis for higher timeframes (daily) – 1-2 years.

most of the quotations on the higher TFS are in a phase of balance for several months or even years, so the analysis of a higher TF you can start with balance, because you have to work in balance. But on lower TF analysis only 4 phases, where the first of them is momentum. Just need to remember that the market is fractal. And then a breakdown of the extremum, which seems like a good idea at the M30 chart, is actually a great idea to trade in the opposite direction, because on the daily chart, quote is near the edge of balance.

the Accumulation of liquidity in the balance sheet often has a rotational form: of balance after fixed on the lower TF it is possible to identify areas of support and resistance intraday players show increased activity (Fig.12). After the balance there is always a momentum in one direction or another.

Fig. 12. Formed of rotational balance after the fix. Hourly chart with daily clusters.

the Actual placement of liquidity in the balance sheet as follows:

1321,8-1323,8 – the most aggressive buyers, below which it never fell.

1325,6-1328 – area aggressive purchases at the bottom of the balance as well as foot the main buyers.

1329,4-1333,6 – the main buyers in the balance sheet.

1336,6-1341 – the zone of uncertainty where liquidity a lot, and it positioned both ways.

1344,8-1349,8 – zone fixes and balances.

Here it is clearly seen that according to the laws of auction at the top of the balance is dominated by buyers, and from sellers in the Delta. The struggle between buyers and sellers creates a rotation, i.e. shift of the surround arrays. A break out area fixes Jun 14, gave the first hint of a new impulse buy. The main argument of the purchases was to be the hold quotes in a range of fixes, i.e. sales of the previous week 1344,8-1349,8. This positioning is clearly indicated, what will be the next pulse.

4.1. Momentum as a continuation of the previous trend

As I have already pointed out 1344,8-1349,8 scored the last buyers and went to the next pulse (Fig.13). Now support has been in the area of 1384, and the accumulation of buyers in 1393-1401. Area 1417-1428 and 1440 were area of the fixes. After rotation of the volume of purchases was typed exactly in the resistance zone inside the balance, i.e. in the area of the original fixes 1417-1428. Today (August 5, 2019) quotation stormed 1470, i.e. entered a new momentum on the hourly TF.

4.2. Momentum as the scrapping of the previous trend

As you may have guessed, the most important argument before continuing dynamics is the extension of the corridor in the direction of the previous dynamics (in our case – in Bay) with subsequent recruitment of liquidity in the former area of the fixes.

And what about scrapping? How to see him in the moment of balance at the appropriate TF?

first, after 2 (rarely 3) touch area fixes and zone's latest assault on the pushing (in this case buyers) the quote must remain in balance. Must be return under a range of fixes.

second, the accumulation of liquidity on a smaller TF should drastically go UNDER large arrays on the respective TF.

third, is going to happen the extension of the corridor below the support the last Bay of the aggressors, even with the return to balance.

fourth, after the return to the balance of the quotation doesn't usually go higher ROS (point of control), i.e. the most traded areas. The extreme area, where the quote can reach – this area of the fixes.

fifth, after the impossibility of higher ROS accumulation liquidity is in the zone of former support OR (more reliable) slightly under the support area. Here we sell based on breaking trends.

Here again is a chart of gold 30 Jul 2017 (Fig. 13). This time 20 minute. After a certain upward trend above 1440 start fixes, but support draw in 1437,6-1438,8. The real fix is staged in 1444-1444,8. Please note that the first approach to the range gave the opposite reaction, although the money wasn't there. When the band gained liquidity, the response was quite unequivocal. After the second call starts a set of liquidity in 1442-1442,6. After this third trip, again 1442-1442,6 and the extension in the buy. But instead of anchoring, we see the scrapping dynamics. If we bought based on the extension to the North, it's time to go. Then we see a set of liquidity in 1440-1440,8, which is positioned on the shorts, breaking 1437,6-1438,8. Under this range there is a buyer that returns a quote to the balance with the test fixes 1444-1444,8 without entering. The last attempt of buyers test the bottom has 1442-1442,6, where until recently they boldly bought. Then the quote goes 1429,8-1433.

Fig. 13. Scrapping trends. 20-minute chart of gold.

Carefully look for sales to begin after the break 1437,6-1438,8 with a total stop for the fixes. Conservative sales in this scheme – 1429,8-1433. Yes, it's the liquidity to continue. We have a beginning of the pulse, and this is the first liquidity, so you could easily sell. There, the market did just that.

From older to younger TF: example of the proper analysis of quotes

so, consider the Ticker GC on COMEX, which is part of the NYMEX, which, in turn, is included in CME Group. The analysis was conducted in mid-June. The analysis is conservative because at the time of writing, the gold was transferred to the balance at time TF. The author managed to join the new buy the momentum that was already visible at the time of writing.

Analysis weekly TF:

let's First look at a quote from 1 January 2015 ie 4.5 years ago (Fig. 14). 1 division rates (cluster), I have 1 dollar, instead of the standard 10 cents. The advantage of professional terminals including the fact that you can compress a quote. I note that there is not only a summation of the prices, but also the totalization. As you can see, all of 4.5 years quote is in a state of balance after the collapse. The whole of the week, it has dividers contracts (gold 2-month futures), and added indicator dPOC (dynamic point of control, the dynamic point of control, which is understood as the area of the maximum number of transactions that are dynamically changeable in time).

Recall that the analysis should start with the momentum and fix, but you need to upload a quote of more than 5 years, and it's not our planning horizon, right? Previous momentum far beyond the horizon, so we believe that gold years balance: quotation calmly walks from the bottom to the top, i.e. from 1201 at 1342, and outputs abroad, is considered by players as an excuse to open positions in the opposite direction.

How to highlight the boundaries of the zone of value and balance, we already know. Just look where you placed the 90%, 70% and 50% and 30% liquidity. In this case, the area cost is allocated according to the extreme values of 1 million contracts in the cluster, and 1274-1297 is the kernel, i.e. the most traded part of the balance, according to the presence of more than 1.4 million contracts in the cluster. In other words, the kernel is the most traded in the area where the compactly collected 20-30% of the total.

Fig. 14. Analysis of weekly TF.

"Stop" — you say. "What other 1.4 million?". The kernel is the most traded area, which is located just near the +/- 1 standard deviation. But the theory theory, and practice suggests that we should look for statistical regularities. Read more about this in the next article. Now just understand that the important statistic, not only the shared profile view.

after Determining the General attitude, we need to identify areas of interest of the participants. Here are two areas buyers. In the first zone range 1189-1210 and the second 1244-1253. The core of the contract can already be positioned as support.

the Area of the shorts in the 5-year balance of the following: 1342-1355 and 1314-1327, which now became support.

the results of the analysis weekly TF:

Gold is in a long-term balance; Now gold has reached the upper limit of perennial balance; Reaction to the border is present on the lower TF; Border achieved pulsed a 1 week period at highest speed in October (more about that next article); If the quotation will enter a phase of pulse on the weekly TF, the former area sales 1314-1327 will be enabled; If the quote will remain in the 6-year balance, in the month of June-July high probability of settlement in the area 1315-1345, or return to the core 1274-1297.

the Analysis of daily TF:

On the daily chart of the observed momentum balance, which can turn into momentum on the weekly TF, and may end, given the analysis of long-term balance and current fixes. Unloaded two ranges 1338,5-1342 and 1345-1348,5. Support 1327,5-1331,5 – day balance (Tuesday, may 4). Can't get lower there is a set short on low turnover. By law, the auction this may indicate that a potential bottom is formed of the balance was found.

Fig. 15. Analysis the daily TF.

In this Monday (or rather, Sunday in the United States; if you do not know, in USA auction starts on Sunday, when we have midnight from Sunday to Monday) left the kernel last week 1338,5-1348,5. In order to buy expected to continue momentum after consolidation, the quote must not go below 1327,5-1331,5, although 1319,5-1323,5 acceptable, but open a new possibility.

the results of the analysis the daily TF:

the Buy impulse is not cancelled, the primary fix is available. Bai shall prevail, but after the formation of a reliable platform. So now the benchmark balance for 3-5 days. We will be watching.

the Analysis time TF:

I won't have. Just re-read the previous section. There was carried out analysis based on the hourly TF. So go straight to the conclusions.

the results of the analysis time TF:

Hourly fixes were in the area of multi-year fixes. The upper boundary is taken into account. The quote works according to the rules of the auction.

Mark phase of the auction: instead of homework

Here's a chart of Texas oil from 1 January until mid-June 2019 (Fig. 16).

to Scroll to the phase of the market on the older TF; Find local fixes and consolidation; Find the value of the balance 2019; Based on the position of the quotes in the balance of the year, determine the potential direction (and not looking at the chart of oil here and everything is clear if to remember about the auction).

Fig. 16. Oil. Daily TF from 1 January 2019.

Waiting for replies under the article.

Conclusion. How to apply in practice the knowledge auction structure?

is Very simple. First, repeat the mantra: "momentum-fix-balance-impulse". Then do the following:

the analysis from higher timeframes to younger: determine the phase of the market on higher TF, middle TF, lower TF (day for a year, an hour a month, 15 minutes per 2 weeks). Compare the results; Evaluate the prospects for market entry, based on the phase of the market. In the example of the gold I showed in mid-June, then it was a VERY INTERESTING place to enter in the medium and long term, because the same phase on all time frames; Define the entry point, stop and profit and wait a moment. Or start your strategy. But only after assessment of the prospects.

In General, it's simple.

And again the main idea. Is way out of balance, i.e. an impulse, implies a fast and aggressive set of liquidity in the plane of the boundaries of the balance, preferably far enough away from the border. The most reliable input after precise positioning liquidity: to continue or to return. And then on a test of this liquidity, you log on, i.e. to buy high / sell low, if liquidity constrained as liquidity in the continuation; or sell high / buy low if the liquidity accumulated in borders of balance, shows return.

In the next article, we'll extend the knowledge of objective parameters, i.e., values of vertical and horizontal volumes that allow you to enter the market with a major player, after a full analysis of the structure of the auction is impossible without the study of the exchange volumes.

With respect, Ivan Rusin