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132 range of historic prices. Medians and Means Although the inflation-adjusted long-term dishibutions show that prices spend much more time at lower levels there is a tendency to consider the average price of a market as the midpoint between the highest and lowest prices. Using the gold example, the midpoint for 1979 to 1993 was $451. The average of all monthly prices will give a reasonable spproximation of a normal price; however, the best measure is the median, or middle, value when all monthly prices are sorted from high to low. The median value for gold over the same period was $381. If we look back at Chapter 2 ("Basic Conc ts"), we find that skewness is measured as the difference between the mean and the median, as a percentage of the standard deviation. In this case, the difference of $70 is a very large value, indicating a dishibution with a peak far to the left of center. For price distributions, the median is a much more useful value than the average, although not as convenient to calculate. The median naturally adjusts for the dcewness in the price pattems. Short-Term Dishibutions Unlike the predictable pattems of the long-term price dishibutions, the distribution pattems of short intervals can vary widely and have been interpreted in many ways. Shortterm disU-ibutions are not anchored to a base level because the entire period of analj-sis may be at prices that are significantly above infrinsic value or production costs and away from equilibrium. Keeping in mind the normal shspe of price disfribution for each market group, a different configuration can be a sfrong indication of expected price movement. Three disfribution pattems are shown in Figure 18-4 (b-d), along with the larger, longterm disfribution (a). The first short-term disfribution (see Figure 18-4b) shows a pattem with a long tail toward the higher prices and a large accumulation near lower price levels in a manner very similar to a long-term chart, but with the extended tail much shorter and a litde more extension on the bottom. This is most likely to occur at low price levels, where most activity is near the bottom with occasional short excursions up. This can be a small segment of a normal pattem or a terrqaorarily higher level that is stable. Figure 18-4c is a bell-shsped, sjmmetric curve that could indicate a congestion area or short-term equilibrium. When prices frade equally within a range they do not exhibit any likelihood of favoring an immediate breakout either up or down. The fourth disfribution (see Figure 18-4d) is most interestmg, because it is skewed in a pattem opposite to (b) and to the normal long-term disfribution. For this pattern to have developed required a relatively short, quick move to a higher price level, then a congestion area formed at the higher level. You can be certain from this pattem that prices are higher than normal. By the very nature of the pattem, we can say that this price level is unstable, and that prices are more likely to go down than up. This last conclusion does not require statiatics, because prices at high levels must not necessarily continue to rise, but they must eventually fall. Identifying Potential Price Moves From the pattems just described, the combination of a disfribution of a long tail toward higher prices, but at a relatively low level, offers no promise of a potential price move. FIGUREl 8-4 Three short-term disfribution patterns. (a)A traditional, long-term disfribution. (b) A short-term disfribution indicating stable prices at a terrqaorarily higher level, or a permanent change, (c) A bell-shsped curve representing congestion but not indicating flirture direction; the market is in suspension or terrqaorarj- equilibrium, (d) The tail points to lower prices with most activity at higher prices; the market is unstable and has substantial downside potential.
Prices that are not near the base level are ahvaj-s likely to move, and the farther they get from the base level, the more volatile they become. Three formations show that there is a greater chance for a move. 1. A broad, often erratic formation indicates volatile, current movement. Prices have not remained at one level and have not yet established a well-defined pattem or trading range. 2. A dcewed distribution (with the tail toward higher prices), the mode well above the base level, and where the current price is at the extreme away from the tail (lower prices) indicates a likely move down. 3. A dcewed distribution (with the tail toward lower prices), the mode wen above the base level, and where the current price is in the tail (lower prices) indicates a likely move down. Any time prices form a disu-ibution ihat is not the same as a long-term distribution, and not at low levels, there is potential for movement and volatility STEIDLMAYERS MARKET PROFILE Market Profile, the effort of J. Peter Steidlmayer, appears lo be a frequency dishibution of intraday price movement but has used time, rather than volume, as its key element. Steidlmayer formalized this technique in 1985 while at the Chicago Board of Trade. The Board considered this such a unique insight that they copjiighted his work as Market Profile and Liquidity Data Bank. It was intended to provide detailed information to fraders about how trading was facilitated. Maiket Profile offers much more than a count of how many times a price traded at one level. With proper shidjing, traders are able to separate participants by time fiame and even identifj their trading patterns. Figure 18-5 shows this technique as it originally appeared, with letters denoting sequential 30minute time periods, and an analjsis of who participated in the trade at each price. Called a customer frade indicator (CTI), these categories are CTI I, the local fioor traders; CTI 2, the commercial clearing members; CTI 3, clearing members who fill for other members and nonclearing commercial fraders; and CTI 4, clearing members who fill orders for the public or other customers not included in the previous groups (outside paper). This information, on whose behalf the trade was executed, is only available after ttie close of trading. To understand what is described in Maiket Profile and the Liquidity Data Bank, you must know that the locals and commercial clearing members, CTI I and CTI 2, account for the largest part of volume (over 65" o), and both have trading stj-les that are very different from the off-fioor speculators who form groups 3 and 4. The locals take smaller positions, often counter to the current price moves and hold that frade for a period spanning seconds to a few hours. Most locals even up at the end of the day, which avoids the need to finance their positions. The commercials might be a bank that is hedging an existing currency e; osure or arbitraging a gap between two or more short-term rates in the cadi market. These positions may move the market but can be insensitive to current price direction and fiow into the market at arbifrary times
Outside paper, a term that refers to customer accounts, range from individual speculators to major fund managers. Because they frade from off the floor, their style of frading favors holding positions for more than 1 day, and a large majority will be frend followers. The stjle of CTI 3 is similar to CTI 4; that is, both tend to be directional, and the two can be combined for the pu oses of evaluation. Although they account for a smaller portion of the volume, they are more influential in the shortterm direction. Fig 3FM DoCHa7i.ie,"£1mclm.gil.erT"file erJ4-h"Ur maikets," Futures (February 1992) 459 SBSeiBgBEgsaeBSlEesBSlsSaEls 93giiBigSBBSiBSiiiisgiSSiss aigiiiia=iiiigeiiiB3igBg§s piSigsssgiseBegesSBsgeBBBBBa ii iii s« lis
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