This document copyright Steidlmayer Software, Inc. August, 2000. All rights reserved.

Introduction to Capital Flow 32 and class notes of August 5th, 2000.


----Importance of self, self-discovery, self-management, and reorientation rather than retraining to more productive efforts.Answer is not in details, but in exploring-advancing to higher platforms.

Having an advanced starting position is not one with detailed completeness, but one for exploring. It is not an ending position that precipitates a completed program. Its rather a continually forward moving base that is more important than trading profits detailed for desired results. [One can compare it the difficulty of climbing Mt. Everest without advancing the base camps to successively higher levels.] Sameness eventually dies. Reorientation is better than retraining as the current base is retained. For example, a General Motor’s welder who is replaced by a robot can advance to a weld inspector because he knows what a good weld is.

------Understanding time management—allows one to manage instead of working directly. The markets need to be measured in terms of time –the vertical/horizontal relationship of development. Time extension requires non-random conditions, as there is no measurement for randomness as the net of results of randomness is nothing. A big trader creates an advantage for himself in the pits by extending non-randomness to his position. Random orders i.e. alternating buy/sell are changed to non-random by the absorption of the counter orders to his position. He can then measure time through remaining capital versus the size of orders he needs to absorb. The reason for exchanges is that the markets are indeed non-random as core order flow is of a consistent nature. [The large trader is fitting the model of the market by using the principle of non-randomness ---in other words, he is not forcing something totally unrelated to normal market activity]

----The greatest benefit of managing through time is a default position of unchanged on your side. To be measured in time something has to be happening, and it has to be overcome before adversity can appear. Non-random conditions in markets come from three different economic scenarios. Those related to contracts, to exchanges, and the marketplace itself. Economics are just measurements and to be measurable things have to be non-random. This allows a pro-active management rather than a reactive one in that decisions are made before time runs out rather than after it has. It also frees ones time before it is needed. A trader needs to spend less and less time monitoring his program by understanding, finding and utilizing non- random market conditions. Every type of trade [regardless of duration] needs to have a non-random platform in order to achieve the time reduction so vital to overhead costs.

-------What’s important to do and what’s not. The standard is called an equivalency ratio. Where anyone can achieve success if the circumstances are correct, it is then worth trying to do. The same holds for experiences outside of our industry. The question is not whether one can do it better because its contrived out of ideal circumstances, but that it’s worthwhile doing in principle. Partial assimilation can then lead to success.

Individual growth is the main goal. It can be accomplished best by having an elevated platform earned through ones own experience. Be a self-starter, take control, and strive to get better. Second, work on techniques, watch what others are doing, move outside your skill level, and be very observant. As you succeed in these endeavors, the most important ingredient is to have a time reduction of work effort at the bottom rung of the ladder. Productivity is a function of output versus manpower. Manpower is declining as an ingredient of success as the ability to manage offers a newer and exiting base in trading. One wants to take his/her experience forward in a manner similar to reorientation rather a retraining way. In other words, build upon what you have because you will gain confidence and more importantly own and control the basis of your success.

Trade management

Trades should be thought of in terms of time duration rather than a monetary one. The reason for this is that it fits the working piece of market activity that best serves traders. Non-randomness is an extension of time created by a force that overwhelms random activity. [The definition of random is that it alternates and the definition of non-randomness is that it is consistent]. Whatever the force or circumstances are, they have to be overcome before the market can change. This gives the trader unchanged on his side for a period of time [equal to the undoing of the imbalance]. An equivalency of this would be the same as someone taking all your losing trades so it very worthwhile to have in your platform. This puts a trader in a less reactive mode, which allow the reactive skill to be called upon in any situation deemed necessary rather than being used as a basic repeated requirement.

Fundamentals of market opportunity

This calls for fitting the model of the market. As a trader, you need to mimic [be in step] with its activity. The foundation of any market is its liquidity as this allows the lowest entry/exit costs. Liquidity denotes a lot of actual interest in a market because to be present others must think there is some kind of opportunity there. [The equivalency relates to a full versus an empty gaming table]

Entry and exiting are by far the most difficult things for a trader to do well. The reason being is that the execution calls for a moment [for a price] of the markets time and moments [also note that these are not organized into market time] are random in nature----therefore the acknowledged difficulty. This also makes shorter term trading more difficult as over a large sample size this difficulty tends to be prevail. To further complicate this beginning and ending procedure for trades is that the very foundation of liquidity is the fact that the marketplace is disadvantaged rather than advantageous. Normal trading environments call for an advantage to be successful, however those trades are mostly just between two parties where one party is usually forced to take the disadvantage due to other concerns. In a multiple participant atmosphere the same disadvantages would apply to both sides especially considering the immediacy needed for an at the market transaction. [You might wonder how both sides could be disadvantaged at the same time, but there is logical explanation that I’m keeping until the December 9th class] In other words, as a pre-condition for liquidity, both sides [buyer/sellers] accept a below the bar level functionality in order to secure the benefits of liquidity. Any good trade then has to overcome this before it can begin to realize its potential. Understanding this paradox will help traders in many ways----especially with their expectations in shorter trade formats and in the amount of time used trying to find an entry advantage. [There are many more fundamentals and actual experiences that relates to the fact that liquidity is disadvantaged].

The natural advantage—time

Time and not price because time offers a great deal more and also is available. It is derived from the fundamental need for exchanges in that collective activity [versus individual] is non-random. Non-randomness produces a time duration measurement that allows entry, exit, and trade management. All trades just need to fit some length of time duration. Measuring market time then is the basic foundation of any trading platform. [Starts with our splitter]. The next step is to organize market data into non-random platforms. This allows one to be in-step with developing market activity. It is important to be able to stay in-step with the market and to do that traders need to trade its wholeness [the entire time duration]. The payoff in trading for the non-floor trader is in the markets largest moves. The same can be said of the entire moves of a smaller nature. In reality, the market does not have many smaller platforms from which to build success. Most traders then artificially fragment the whole nature of opportunity. This puts them out of step with the market and hopefully in-step with their program. In other words reliance is totally on self now. I want to note here that good traders usually have a sound base of objective parameters that allow them to function successfully. The also have the ability to extend this base further when called for [very much like an athlete that uses his training as a base and his will, determination, and focus are the extensions]. I really do not think that such individualism can carry the entire load for long. It need to be held in reserve and therefore provides to first step of a trader moving to a management platform from a manpower one.

Time Management Base

Contract settings:

Observation-collecting data----splitter creates the vertical/horizontal relationship necessary for market time determination. Auto organizer sets out the minimum size of engagement units. The engagement units are the first means of trader communications with the market [the real difference in Capflow 32 and 3.7 is in the size of the first engagement units]. The auto organizer setting allows one to select a smaller or larger unit in relation to a normal trading session. The page two mark settings allows the grouping of a much larger data mass. Together they offer critical observations that reflect the change in market activity while being stable. This stableness comes from capturing non-random activity that is the reason for the marketplace existence. [Individual bytes of market data tend to be random in nature, therefore a process of assimilating them into larger engagement units is by itself a movement to non-randomness as a base for further processing.]


Organizational---reading the data -- F4

The market activity database settings offer a very broad and tolerant band for reading the smaller engagement units set out earlier. The range of the dots [from red-green-blue] is from the more rapid to the slower moving. [Notice that the setting before red is a line and represents the fastest movement.] There is no ideal setting as most market change quite rapidly depending on the nature of the trade at the moment. The settings serve like a large net ---the width of which is determined by the gross horizontal difference between the choices.[first and last] This horizontal movement represents market time i.e. slow or fast and is relative to the whole of the set complex. The basic test of the settings [regardless of the size of the engagement unit’s chosen] is to be able to determine the meaning of the blue dots. The way to do that is to look at the fourth unit preceding the blue dot noting the direction to the blue i.e. if the direction is down then the market is slowing due to the buying [forcing the market more horizontal] and vice versa if it is rallying. The other dots covey the same message only at a faster pace. A line means that time was not available for anyone to take advantage of the opportunity. [Whatever] Where the blues do in fact hold [both the up and down] the market will move sideways, where one side fails the market will be directional.

The page two marks are shown as clear square boxes overlaid upon the dots and line of the earlier discussed settings [F4]. The amount of raw data making up the mass of a page two mark is quite variable. Each mark is formed with some type of vertical movement at the end of the data mass. This means that the market was moving directionally at that time. One can then notice that a very brief amount of time is spent on one side of the mark. This again illustrates the non-random characteristic nature of the market and allows us to use a series of page two marks to depict the whole or largest non-random measurement of market activity in later programs.


The first exchange was born out of necessity. Since exchanges are still with us, the service provided had to have economic justification and that justification needs to be examined. Economics are a form of measurement so we need to fit our analysis to the measurement of this fundamental need. The core order flow coming to a marketplace is never balanced between buy/sell volumes nor do these imbalances correct themselves over time [one side is always imbalanced—also note that it is not the job of the marketplace to find and maintain a balance so it doesn’t]. This consistency is of major importance to the trader as it can be defined as non-random. It is important to note that while each individual trade is of itself random, the collection of all such orders into a flow changes this individual designation to one of non-randomness. This creates the need for the exchange [third party participation] and becomes the basis of measurements that allow economic objectivity to aid the trader.

There are two basic conditions that set the tone for this analysis. The participants’ i.e. the buyers-sellers-third party create the atmosphere. Where the third party is dominant, the buyers and seller are forced to trade at the same prices in a fair area. The dominant [if present] force is determined then by one party forcing the others to participate in their direction. Where the third party is not dominant, the flow coming from the buyers or sellers is in control by default. Markets will shift between these modes making trading activity more difficult to read. Regardless of the mode, a trader needs always to be on the side of dominance for objective control.

F10—defining the flows

The data is converted into designation indicators of heavy buying [buy flow] and light selling. [Blue pluses and green minuses.] Selling flow are made up of red minuses and green pluses. These respective combinations represent the whole—a non-fragmented measurement that represents the basic non-random nature reflecting a flow. [Note that by definition heavy activity in one direction has to be accompanied by lighter of the opposite.]

The beginning of the flow is defined in a broad rather than narrow context. The page two marks constitute a means of determining flow continuation due to the fact that a directional flow has shown the third page two mark back will not be violated. We have used a violation [market penetration of third page two mark] as an arbitrary start to a new flow direction. A blue or red triangle is used to indicate the beginning of such activity. To cover for the more random designation of a flow beginning, we have extended linearly [through time] the definition of this beginning to include a start, a continuation, and an end. Since the flow in made up of dominate activity, trading after the start [where non-randomness is present] provides the a foundation for consistent success. The focus remains trading this consistent whole while sacrificing the more fragmented [therefore random] entry process. The same holds for the exit process. Entry and exit are the most difficult things to do and they will be explained in a later section that deals with the economics of the marketplace. [Note that the role of the individual is not high]

F4—contract economics

Most commodity contracts are written for very broad rather than narrow use. As the market moves directionally, it attracts participation that is diverse and not highly concentrated on an individual basis. [The same holds for stocks] Collectively, it is a far different story, as most of this attracted volume tends to sell rallies and buy breaks. The force is not nearly as great as core activity in that it can not bring immediate change to what is going on in the market. It is rather the response to directional activity caused by the core flows and in of itself can remain remarkably persistent. Its persistence then allows a measurement that is non-random and further allows one to trade where the economics of what is taken place is wrong rather than right. Core flow activity is much stronger than contract economics and having contract economic being wrong [remember contract economics counters it] only increases the strength of the flow as now those wrong have to exit in the direction of the flow.

The economics of the marketplace

Liquidity is the backbone of any market. It provides a means to enter and exit the market at a reasonable cost basis. Its foundation is that the market is a disadvantaged situation most of the time. Experience has shown that most good fills end up as bad trades while the opposite is true of bad fills. Another easy indicator for experienced traders to read is that when the market looks the best it is not good and vice versa when it looks the worst. There are many other reasons we can site but if it was advantageous most of the time no one would make the opposite trade and there would be no liquidity. The economics of trading revolve around this paradox. It is countered by ease of entry exit [liquidity] that allows participants to approach the market from a gross rather than selective viewpoint. Most non-floor traders have adopted the selective viewpoint unfortunately because of costs and trying to be perfect. They then are forced to look for the needle in the haystack because the advantageous situations are mostly momentary. This start begins the process of breaking the chain of connection from the model of the market to the trader. The market payoff does not come in a way that rewards one consistently [because of the basic disadvantage], but rather rewards one in a more sporadic manner [brief moments]. The combination then of perfect entry/ exit combined with erratic payoffs is most difficult for traders to overcome in the long run. A more or less random entry /exit coupled with a winnowing program that drops the losing trades would then give by default the good ones. This has the equilivancy of having unchanged on your side in a relative way and far exceeds what the individual can do in the disjointed program outside the model of the market. [See our longevity program]


Defining the whole—the winnowing process using core flows [longevity program]

The core non-random flow can be measured by the third page two mark [linear progressive market time] in any dynamic situations [forward market development]. By staying inside of this measurement the market illustrates its confirmation to this basic fundamental of trading and markets. It is a whole meaning that any aberrations within this movement are not recognized. This process can be fragmented at a measured cost or benefit. One must note that a good trade of any medium duration can always be fragmented into parts, however, the ensuing results must exceed the passive result of the whole in order for the effort to be economic. Most traders have a static uniform segment [related to time or dollar amount] that automatically fragments this whole and on balance is more counter- productive than productive.

A winnowing process that establishes exiting [using the basis of unchanged on your side] as a selection process is one that fits the model of the market in two important ways. First, it does not seek an advantageous situation as a selective process, and second it allows maximum exposure to the sporadic nature of market payoffs. It defaults into the traded product largest directional move. The more difficult entry/exit processes are not featured at all as part of this program as the random [it is random because it alternates] occurrence of a third page two mark is the trigger for both entry and exit. This does not mean that these two areas can not be addressed by the trader, but the work effort needs to be an improvement over the randomness. The characteristics of the winning trades are that they will last much longer in terms of time than those that do not work out. One can clearly see this by using our longevity program where trades are listed by date and sorted for flow direction. The program can be considered a raised platform as it has a positive basis [winning by design] from which to approach your trading goals.

Defining the whole---where economics are not working for a class of traders

Core activity is made of non-random thrusts that are usually meet with passive resistance [contract economics] to the opportunity it presented. In other words trade of an opposite nature. This activity is also non-random and is mostly within the boundaries of the core flow activity [the largest whole that we define] Normally, this type of activity [being inside of] would constitute a fragmentation of the former. However, we are not using it to breakdown the core flow, but are looking at it as an independent whole within the context of its own usage. It instead is an internal non-random event. Where it starts and ends can extend be well out side of core flow because of this independence. What we are looking at here is a lessor force of activity that is being overcome by a larger one. We have created thrust display and have overlaid the response to directional market activity [F4] on top of the thrusts [black-up—red-down]. This display is triggered [F8] by moving the cursor to the left of the page creating a red horizontal line after triggering F10. The dots/lines of F4 are placed on top of the thrusts. {I would like to point out that this display can do a lot more for us and we will illustrate other points at a later date}

The essence of this program is that we are going to follow economic measurements thus produced and trade their entire length. The starting point occurs at a random market juncture where any combination of alternating thrusts that has at least one dot [each thrust] When the market exceeds this range, it indicated that one side of the economic equation is wrong. [Note that this is the same condition that big markets have—note the equilivancy relationship]. The trade is then continued if it remains above the top/bottom of the random range until a counter thrust [with dot] to the trade direction is violated. At this later point, a new trade can be made because a new random juncture has been created.

Creating a whole-- trading cash flow will be the main topic at December 9th class

Defining another whole—volume

Volume arises from the actual use of the market. It is therefore the closet measurement possible to the start of non-randomness. Since it is internal [within] and so close, the most used functionality is to use it to find break points [that are counter or are returning to flow direction] that can fragment larger non-random events. There is nothing wrong with using it in that way. It can however stand alone as a non-random platform and that what we are going to discuss here. Volume has different levels of usage and has parallels to the disadvantageous situation in the marketplace. Most profiles [90-95%] have the first half of the day with more volume the second half. The equilivancy ratio rates with fact that the marketplace is disadvantageous [for liquidity] so one can assume that the sample size of the normal volume dispersal is disadvantaged. A trade condition where something needs to be overcome before any benefits can start. Looking at the reversed situation, there has to be a force in place [equivalent ratio---to the heavy activity of respective flows—pluses-- minuses of F10] to have changed the situation. This force then needs to be removed and this normally takes some time. Time is the equivalent to non-randomness. This is not much different than a large trader extending time by taking all adverse order flow. Note the importance of the equivalency ratio to understanding how to set up various outputs. Our block volume display illustrates the first/second half profile volume and our volume iteration platform allows a great deal more combinations to be exposed. Its recall display currently has a more random output, which makes it difficult for the inexperienced. We are in the process creating an additional iteration platform that creates more of a whole output. The only key to using it is to understand ways volume can extend time [and therefore present conditions forward] so that any aberrations will be absorbed into the whole without impeding the opportunity.

Defining a whole---order flow imbalances CBOT

This information is a similar measurement to taking soundings on the depth of a river. The measurement tends to be varied but still non-random within an accepted norm of change. Our initial displays [since they are taken from day units] have tended to be analyzed in a more random than non-random fashion because of the presentation. They are very hard to use in that manner, as all platforms for trading need to be organized into non-random platforms. We are in the process of creating additional displays so that the non-random characteristic is brought to better focus.

The source of OFI comes from the combined activity of the core flows and contract economics. It would be nice to have separate data for each because they are counter to each other. Still it is a very valuable display in meaningful non-random formats. Our first format is to divide the buy orders into the sell orders and come to a ratio. This is then displayed either on top [less than one] or bottom [greater than one] of the profile. The ratio gives an order size imbalance as the sounding [a ratio greater than one indicates larger buy orders and one less than one indicates the imbalance for sell orders]. The largeness of the orders can be construed as commitment and commitment means stability. Therefore the direction [up/down] should hold or advance. What this means is that given a selling or buyer ratio, the low or high of the previous day should not be taken out for long [three time period is to much] and there is a good chance that the direction will continue. The non-randomness then is extended to having the new activity equal [opposite] to the previous profile or moved in a positive way directionally.

The serial nature of the activity also creates a non-random base in that the soundings of the core flow should be consistent. We have created a columnar display where orders per contract are listed.[left click on news] This offers more than I can spend the time on right and will be discussed in the December class.

In an attempt to take the data outside of the combined category, we have created a visual program that color-codes the individual units as per buy/sell ratio. This display serially depicts the random/non random characteristics of the data and at the same time allows an objective view of the effects of the trade generating from contract economics. The tolerance level is quite high as a missed diagnosis has pretty much the same effect [equivalency ratio again].


Subject for December 9th class

Note—the EDP Platform @ NYMEX, Market Profile and Market Profile + @ CBOT are licensed base components of most Steidlmayer Software products.

This document copyright Steidlmayer Software, Inc. August, 2000. All rights reserved.