Understanding the Auction Process

[Rocky Mtn Trader 10]

I have read both the CBOT MP manual and Mind over Market. Here are a few questions I have relating to MP.

 

1) Why does the ES move up or down?

 

2) Doesn't the S&P move according to the movement of the 500 stocks in this market?

 

3) Why does the ES (S&P), the YM (Dow), and the ER (Russel) all move in rhythm with each other?

 

4) Doesn't the YM (Dow) and the ER (Russel) also move up or down accoding to the individual stocks represented in their markets?

 

5) Isn't the ES traded in an auction in the "pit"?.

 

6) Is the YM and the ER traded in an auction in the "pit"?

 

Can someone help answer these questions for me? When these get answered, I have more. I was going to list them all on this post, but I would like to have these answered first, then I can move on to the next set of questions.

 

I think that when all my questions get answered, it will help a lot of people understand really what is happening in the market.

 

Please, please, just answer the 6 questions I have above. Trust me...there will be more.

.

[bh_trade 10]

1. More aggressive buyers or sellers

2. Yes

3. They are highly correlated

4. Yes

5. No, SP is pit traded, ES is electronic only

6. No, electronic only

 

 

I have read both the CBOT MP manual and Mind over Market. Here are a few questions I have relating to MP.

 

1) Why does the ES move up or down?

 

2) Doesn't the S&P move according to the movement of the 500 stocks in this market?

 

3) Why does the ES (S&P), the YM (Dow), and the ER (Russel) all move in rhythm with each other?

 

4) Doesn't the YM (Dow) and the ER (Russel) also move up or down accoding to the individual stocks represented in their markets?

 

5) Isn't the ES traded in an auction in the "pit"?.

 

6) Is the YM and the ER traded in an auction in the "pit"?

 

Can someone help answer these questions for me? When these get answered, I have more. I was going to list them all on this post, but I would like to have these answered first, then I can move on to the next set of questions.

 

I think that when all my questions get answered, it will help a lot of people understand really what is happening in the market.

 

Please, please, just answer the 6 questions I have above. Trust me...there will be more.

.

[MC 10]

I have read both the CBOT MP manual and Mind over Market. Here are a few questions I have relating to MP.

 

1) Why does the ES move up or down?

 

The market moves because it HAS to. Moving is how it seeks out and finds accepted value. How does it move though, well big money accumulates on the way down, then sells their shares (and shorts) at the top to people chasing news. Then rinse and repeat

 

2) Doesn't the S&P move according to the movement of the 500 stocks in this market?

 

In theory yes, though probably not ever perfectly to the tick. All the markets tend to have alot to do with each other in some way shape or form.

 

3) Why does the ES (S&P), the YM (Dow), and the ER (Russel) all move in rhythm with each other?

 

They are controlled by people with the same objective I suppose. See above answer, ALL markets are tied together whether inverse or in tandem relationships to another market.

4) Doesn't the YM (Dow) and the ER (Russel) also move up or down accoding to the individual stocks represented in their markets?

 

Futures contracts are based on movements of the underlying, though they do seem to differ in numbers to some extent. That could be since it's a future contract and not based on the here and now?

 

5) Isn't the ES traded in an auction in the "pit"?.

 

6) Is the YM and the ER traded in an auction in the "pit"?

 

Not sure what were you going for on 5 and 6. What's the thought about pit sessions?

 

As a whole, I think these questions are way too granular. Honestly, who cares why rice is more expensive in one store than another? Shop wherever you can get it cheaper. Trade a contract that fits your risk tolerance and personality. One that flows a way you can feel and understand best. Just understanding it's an auction is enough, then seek times where supply and demand are mis-balanced and take advantage of the emotional trading of others.

 

All JMHO

[Rocky Mtn Trader 10]

thanks bh trade for your responses. First of all, I agree with your answers. Lets look at what they mean.

 

1) More aggressive buyers and sellers...ok.

 

2) The S&P moves according to the 500 stocks. So (in its most simple form) we could conclude that if 250 of these stocks were moving up more than the other 250 stocks were moving down...then the S&P 500 index would be moving up...right?

 

3) The ES, YM, and ER all move "basically" together because many of the stocks in these indexes are the same? I'm sure many of you experienced traders have watched the ES, YM, and ER at the same time. In fact, many of you watch them when you trade because often one will give you a signal that is slightly delayed from the others. Hence, helping with an entry or exit of a trade.

 

Here is an interesting point ! ! !...pull up any day, and compare the ES, YM, and ER. It is quite obvious that they don't move exactly the same, but in general, they move in a similar path. On any given day, there are these sudden spikes in the market...either up or down. Why do ALL these indexes have the same spike? When one of these markets drops radically, they all do. If an auction had anything to do with their movement, this would not be possible.

 

4) Your answer to #4 was that the YM and ER also move according to the individual stocks in their index.

 

5) If the S&P is traded in the pit, then how can you say that the S&P moves according to the 500 stocks? It can't be both ways can it?

 

6) If the ES, YM and ER are all electronically traded, then what does volume have to do with how these markets move. The ES trades 2.5 million contracts a day, the YM and ER only trade 250 thousand contracts a day. Again, what does volume have to do with the ES, YM and ER moving. It doesn't. The ES, YM and ER are going to move according to what the stocks in these indexes are doing. If there is more up movement in these stocks than down movement, these indexes go up.

 

I have been in an "auction market theory" live trading room in the last month to observe. I will not mention the site. While listening to the mediator explain auction market theory, we were watching the market footprint and volume at price as it was happening live. As he was explaining that the market auctions down when you have more selling than buying...the market started moving up. Let me tell you that there was a LOT more sellers than buyers on the screen, yet the market shot up.

 

Someone in the trading room asked the mediator why this was happening? He would not answer the question. I witnessed this happening regularly. After watching this "price auction at price", it has nothing to do with the market moving up or down.

 

This is my conclusion...please someone correct me if I am misinformed...

 

The S&P moves according to the individual stocks. The pit traders are doing nothing but buying and selling at different price levels. They have no bearing on moving the market. The S&P will move up or down on its own. The pit traders are doing what we do at home except they are "in the action". If these pit traders didnt trade for any given day, the S&P will still move in accordance with the stocks in their index....just like the YM and ER are doing at that moment.

 

If the pit traders could move the market, then the ES would NOT move the same as the YM and ER. Come on...this is common sense.

 

Another interesting point...Have you ever listened to the auction process in the pit? It is obvious as the auctioneer is calling out the auction. Have you ever listened to what happens when the market suddenly sells off, or shoots up? The auctioneer stops talking. There is no way the auctioneer could talk that fast...let alone for anyone to understand him and be able to make a trade. If the "pit" was moving the market according to the footprint of buyers and sellers at a given price, then the actual auction would not be able to move up and down that quickly. Yes, the market would move up or down, but it would take a little longer for the auctioneer to move things along.

 

Two new questions for you experts out there:

 

7) Are commodities, like soybeans, corn, gold, etc...traded by an auction?

 

8) Are any individual stocks in the ES, YM or ER indexes traded by an auction?

 

After I get the answers to these two questions, I'll make my next points.

 

By the way, I'm not discounting MP.

 

.

Edited June 16, 2008 by Rocky Mtn Trader

[thrunner 10]

Most of the price discovery process occurs in the Emini market and futures do lead the cash price during most time periods. This does not mean the futures can pin the cash market. There will be arbitragers to keep the auction process in balance. Google for 'index futures arbitrage' if you are interested in this subject.

 

The literature on the price behavior of stock index futures in relation to the underlying cash index has concentrated on two related issues: (1) the lead-lag relationship between the futures and cash prices, which also relates to the ability of futures to"predict" subsequent cash index prices, and (2) the pricing and rbitrage of stock index futures markets. Section I of this paper includes a summary of the research concerning these two issues. The studies on the lead-lag/price discovery relationship which uses intraday data provides consistent conclusions that futures do lead cash prices during most time periods. This lead effect of futures implies that the use of matched futures-cash prices may provide biased results for arbitrage studies.

 

[Rocky Mtn Trader 10]

Thanks MC...

 

This thread is not meant to be an argument. I am simply asking questions and would like the experts on this site to answer them.

 

When you speak of volume...like in the ES...what volume are you talking about? People like you and I buying and selling contracts at different price levels?

 

I understand perceived value at different levels.

.

.

[Soultrader 12]

1) More aggressive buyers and sellers...ok.

 

Its just more traders on one side expressing their opinion. The bigger the trader, the better the trader. Stack a few of them on one side and you have enough volume to trigger a chain reaction for other would be longs/shorts to enter and those who are losing money to cover/liquidate. Hence, further price movement. Just make sure you are on the same side as the well informed.

 

2) The S&P moves according to the 500 stocks. So (in its most simple form) we could conclude that if 250 of these stocks were moving up more than the other 250 stocks were moving down...then the S&P 500 index would be moving up...right?

 

I guess so... never paid any attention to the cash.

 

3) The ES, YM, and ER all move "basically" together because many of the stocks in these indexes are the same? I'm sure many of you experienced traders have watched the ES, YM, and ER at the same time. In fact, many of you watch them when you trade because often one will give you a signal that is slightly delayed from the others. Hence, helping with an entry or exit of a trade.

 

I tend to not look at other indices. I do look at the government bonds dependant on the market I trade. For the Nikkei, I watch the JGB. Just like I watch the big Nikkei for the mini Nikkei or TOPIX for the Nikkei\mini Nikkei. Youre right about one market giving leading signals. Today, I took a long on the JGB based on Nikkei resistance. etc....

 

Here is an interesting point ! ! !...pull up any day, and compare the ES, YM, and ER. It is quite obvious that they don't move exactly the same, but in general, they move in a similar path. On any given day, there are these sudden spikes in the market...either up or down. Why do ALL these indexes have the same spike? When one of these markets drops radically, they all do. If an auction had anything to do with their movement, this would not be possible.

 

All of them had the same spike... probably because ES caused the spike first. Have Russell dive 5 quick points.. I doubt the ES would catch up to it. Identify the strong leading indexes. Like TOPIX and Nikkei are closely correlated. On the other hand, the Nikkei doesnt give a rats ass about the KOSPI.

 

4) Your answer to #4 was that the YM and ER also move according to the individual stocks in their index.

 

I personally dont care what stocks move. It doesnt help me trade better.

 

5) If the S&P is traded in the pit, then how can you say that the S&P moves according to the 500 stocks? It can't be both ways can it?

 

If you want some insight, just observe the big heavy weight stocks. During the sub prime panic, traders were sensitive to financial stocks. I would assume big pit traders also looked at them to determine whether they are likely to short or long. Also, why do a group of stocks seem to move in tangent with the futures? Simple.. basket orders.

 

6) If the ES, YM and ER are all electronically traded, then what does volume have to do with how these markets move. The ES trades 2.5 million contracts a day, the YM and ER only trade 250 thousand contracts a day. Again, what does volume have to do with the ES, YM and ER moving. It doesn't. The ES, YM and ER are going to move according to what the stocks in these indexes are doing. If there is more up movement in these stocks than down movement, these indexes go up.

 

I have been in an "auction market theory" live trading room in the last month to observe. I will not mention the site. While listening to the mediator explain auction market theory, we were watching the market footprint and volume at price as it was happening live. As he was explaining that the market auctions down when you have more selling than buying...the market started moving up. Let me tell you that there was a LOT more sellers than buyers on the screen, yet the market shot up.

 

Someone in the trading room asked the mediator why this was happening? He would not answer the question. I witnessed this happening regularly. After watching this "price auction at price", it has nothing to do with the market moving up or down.

 

Youre only confusing yourself even deeper. How do you conclude a market auctions down? Lower prices? Lower value?

 

In my opinion, all you need to learn is price patterns (in terms of bundle of bars) and volume. You have selling at a certain level? Price will auction down until the selling is cut off and enough buyers step in to lift prices again. Which is why I can exploit short term price swings.... with longer term trading I have no clue what its going to do.

 

Two new questions for you experts out there:

 

7) Are commodities, like soybeans, corn, gold, etc...traded by an auction?

 

Everything is. They might as well call the markets > "Finanicial Auction" The only difference is the objective behind the trader. Is one speculating? Hedging? Investing? etc.... Many firms buy futures for actual physical delivery. We all have a different purpose to be involved in the markets.

 

8) Are any individual stocks in the ES, YM or ER indexes traded by an auction?

 

Everything is an auction. The purpose of the stock market is to sell inventory at a higher price. The only way insiders can do so is to auction it out.... price may auction higher on positive news since the public are naturally greedy. Price may auction lower on negative news since the public plays on small capital leading to weak hands and fear.

 

You take the two examples above... put yourself into the mind of an operator with one objective. Sell stock at a profit. So how do you go about doing this? Sell on rising prices... as higher prices will attract more buying. Its simple human pysch. Demand does not even have to be present... human greed is so easy to exploit, all you have to do is jack prices up high to lure in all the greedy public suckers. Its just how the game is played.

[Soultrader 12]

I have been in an "auction market theory" live trading room in the last month to observe. I will not mention the site. While listening to the mediator explain auction market theory, we were watching the market footprint and volume at price as it was happening live. As he was explaining that the market auctions down when you have more selling than buying...the market started moving up. Let me tell you that there was a LOT more sellers than buyers on the screen, yet the market shot up.

 

Someone in the trading room asked the mediator why this was happening? He would not answer the question. I witnessed this happening regularly. After watching this "price auction at price", it has nothing to do with the market moving up or down.

 

Take a look at the chart. The two highlighted points... would you consider new highs as the markets auctioning higher? But wait... the markets reversed and auctioned lower. Why?

 

 

You can see how the markets were sold into at these high prices. So who caused price to reach new highs for the day? The dumb money. Who took advantage of high prices and sold their inventory? The smart money.

 

Now.... my definition of auctioning higher can be seen through the chart below. Notice 6/16 is auctioning higher compared to 6/13 in terms of value area.

 

[Soultrader 12]

heres another ES trade from today using market correlation, volume and price analysis.

 

FTSE broke passed Previous day high to be rejected. ES lifted on good volume but had no follow through. The second highlighted circle on the ES chart was the confirmation. The FTSE and DAX was the leading indicator here.... I missed a short on the FTSE (did not get an ideal entry point) so I went to the ES instead.

 

 

I use correlations like this to identify possible setups whether it be reversal or continuation (momentum). Especially more on the Nikkei.

[firewalker 10]

I think you raised a number of interesting questions there, Rocky. Most questions have already been answered, so I'll just add this:

 

2) The S&P moves according to the 500 stocks. So (in its most simple form) we could conclude that if 250 of these stocks were moving up more than the other 250 stocks were moving down...then the S&P 500 index would be moving up...right?

 

Although you said "in its most simple form", it's worth to note that the weight of each stock in the index is important. Especially if an index is only composed out of a small number of stocks, the rise of three big caps can easily outweigh the fall of a dozen smaller caps.

 

It's interesting to observe the correlation between several US indices, in particular the DJIA and the S&P considering the former is a price-weighted index. This means an absolute rise of 1$ in a 300$/share can be negated by a 1$ drop in a 5$/share; the S&P is a market-weighted index (recently changed to a float-weighted index, although this doesn't make as much difference).

 

What I'm trying to say is that the index does not move up or down just because the number of stocks that go up outweigh the number of stocks that go down. It's a bit more complicated than that

[firewalker 10]

Sell on rising prices... as higher prices will attract more buying. Its simple human pysch. Demand does not even have to be present... human greed is so easy to exploit, all you have to do is jack prices up high to lure in all the greedy public suckers. Its just how the game is played.[/color]

 

Wow. A lot to think about in only a couple of sentences there Soultrader. I decided to start up a new thread at once as my reply got more lengthy than I expected. See here:

http://www.traderslaboratory.com/forums/showpost.php?p=40123&postcount=1

[MC 10]

In my opinion, all you need to learn is price patterns (in terms of bundle of bars) and volume. You have selling at a certain level? Price will auction down until the selling is cut off and enough buyers step in to lift prices again. Which is why I can exploit short term price swings.... with longer term trading I have no clue what its going to do.[/color]

 

...put yourself into the mind of an operator with one objective. Sell stock at a profit. So how do you go about doing this? Sell on rising prices... as higher prices will attract more buying. Its simple human pysch. Demand does not even have to be present... human greed is so easy to exploit, all you have to do is jack prices up high to lure in all the greedy public suckers. Its just how the game is played.

 

Pure gold comments, especially the last part about human greed.

[Rocky Mtn Trader 10]

Soul Trader, you trade the YM...correct? When you speak of volume in the YM, what volume are you speaking of? Is it the traders that are trading the YM?

 

I understand how profit works in the buying and selling structure of society.

 

If you are trading the YM, you are buying and selling price movements of the YM. The YM moves according to what the stocks in that index are doing.

[Rocky Mtn Trader 10]

If you and every other person who trades the YM decides not to trade that day, the "volume" in the YM would essentially be zero. Right now the YM trades @250K contracts per day. I wouldn't say this is high volume by any means.

 

The YM is still going to move up and down regardless if no one trades that day.

[MC 10]

Soul Trader, you trade the YM...correct? When you speak of volume in the YM, what volume are you speaking of? Is it the traders that are trading the YM?

 

I understand how profit works in the buying and selling structure of society.

 

If you are trading the YM, you are buying and selling price movements of the YM. The YM moves according to what the stocks in that index are doing.

 

I think he mainly trades the nikkei and the ES now if I'm not mistaken.

 

If I'm trading the YM though I would trade the YM, not the 30 stocks that make up the underlying. I'm a simplistic type, I don't want to convolute the issue further. I've been there and done that my first year on the market with indicators and other trial n' error methods. :crap:

 

I do use UVOL compared to DVOL as an indicator for the overall health of the US markets. And since we've talked about how they move in tandem, what works in one should work in the others as well. It's no grail, but it helps me spot hidden selling like what James is pointing out on the charts below. I can see hidden selling on charts and this gives me an added level of comfort is all. I could trade fine without it I'm sure.

[MC 10]

If you and every other person who trades the YM decides not to trade that day, the "volume" in the YM would essentially be zero. Right now the YM trades @250K contracts per day. I wouldn't say this is high volume by any means.

 

The YM is still going to move up and down regardless if no one trades that day.

 

I think wise traders trade where the volume was seen. This puts you on the pro's coattails.

 

Pro money moves markets, they also leave footprints. Follow the trail of their money that they left behind in the retail herds hands.

[Rocky Mtn Trader 10]

An index is moving according to a combination of stocks. If one sector of that index is on an upsurge, then the index most likely will be affected by this upsurge.

 

I not saying that the markets don't move from human emotion. Of course they do. I also understand that the whole market in general in an auction process.

 

Human emotion has more to do with an individual stock moving. In the auction process of stocks, the "other timeframe" traders have a big impact on manipulating the movement of stocks...as told to us by M.O.M.

 

These "other timeframe" traders can affect how soybeans are trading, and the whole MP theory is directed toward that.

[MC 10]

An index is moving according to a combination of stocks. If one sector of that index is on an upsurge, then the index most likely will be affected by this upsurge.

 

I not saying that the markets don't move from human emotion. Of course they do. I also understand that the whole market in general in an auction process.

 

Human emotion has more to do with an individual stock moving. In the auction process of stocks, the "other timeframe" traders have a big impact on manipulating the movement of stocks...as told to us by M.O.M.

 

These "other timeframe" traders can affect how soybeans are trading, and the whole MP theory is directed toward that.

 

I don't fully agree...I think you're taking an overly simple approach as to what drives a broad index. There's more to it than an index moving JUST because of the stocks it's comprised of. Of course probably none of this discussion will help anyone profit from the markets, nor do I think about this stuff myself till now.

But...

 

I think things are so intertwined that emotion on the YM CAN and WILL effect the price of individual stocks making up the underlying DOW. Just the same, a sell off on a top performer in the DOW will trigger selling in other DOW tickers which will in turn pull that market lower. The YM being down will surely effect the ES as well as tickers in the S&P. So on and so forth. You could kill yourself thinking or debating the intricacies of the markets and how they are linked.

 

This is also why I like trading the indicies, futures on them or ETF's. They ARE the index rather than playing AAPL and wondering if the NAS will be cooperating with my position on AAPL.

 

Anyhow, I like to be simple on things...I don't care about the order of planets or magnetic pull anymore than I care about the why the market is going up. The market is way too big for me to understand as a whole, luckily you can profit from understanding a small slice and sticking to that piece of the pie though.

 

Good luck, I hope you get the answer you're looking for.

[Rocky Mtn Trader 10]

I agree with what you said...the markets are all innertwinded. News in one sector effects the emotions of traders in another sector...hence moving that individual stock...hence effecting the movement of the index.

 

But it's these individual stocks in an index that makes the price of that index move up and down. If you are trading the YM for instance, the "volume" in trading the YM is not moving the market. The YM is generating its volume from people trading different price levels at time, while the index is moving as a whole.

 

The "other timeframe" traders are not moving the YM. The "other timeframe" traders are moving the individual stocks in the YM.

 

Yes...the pros are good at determining price at levels.

 

Yes...you do not need to know this when trading the YM. You can still trade and make profits.

 

I guess my point is that there is so much talk on this forum about volume at price on the ES, YM and ER. People who are trading these cash indexes are referencing volume as though they are trading individual stocks when volume actually has an impact at different price levels.

 

I am not talking about being able to trade these indexes and make money doing it.

[MC 10]

I agree with what you said...the markets are all innertwinded. News in one sector effects the emotions of traders in another sector...hence moving that individual stock...hence effecting the movement of the index.

 

But it's these individual stocks in an index that makes the price of that index move up and down. If you are trading the YM for instance, the "volume" in trading the YM is not moving the market. The YM is generating its volume from people trading different price levels at time, while the index is moving as a whole.

 

The "other timeframe" traders are not moving the YM. The "other timeframe" traders are moving the individual stocks in the YM.

 

Yes...the pros are good at determining price at levels.

 

Yes...you do not need to know this when trading the YM. You can still trade and make profits.

 

I guess my point is that there is so much talk on this forum about volume at price on the ES, YM and ER. People who are trading these cash indexes are referencing volume as though they are trading individual stocks when volume actually has an impact at different price levels.

 

I am not talking about being able to trade these indexes and make money doing it.

 

If I read into that right, I think you're talking of open interest on futures in comparison to the float on the stocks that make up the underlying index...yes?

 

That's the thing with volume on futures...there is no float really is there?

On stocks you can see when most the float has traded hands and it's easier to spot an imbalance. On futures you could have a showing of no demand only to have it blast up in your face.

 

There is the COT report or what not to show open interest on futures...has anyone used that successfully that cares to comment?

[Rocky Mtn Trader 10]

I am not saying these things to offend anyone. I'm just making a point how people seem to think that the ES, ER, the YM reference volume the same as the stocks that make up the index and cause it to move in the first place.

[Rocky Mtn Trader 10]

Back to what I stated earlier....if no one traded the YM, it is still going to move the way it would have if people were trading it.

 

Am I correct in this statement MC ??

[MC 10]

I am not saying these things to offend anyone. I'm just making a point how people seem to think that the ES, ER, the YM reference volume the same as the stocks that make up the index and cause it to move in the first place.

 

No offense taken here, and I don't think others are offended either.

 

I know what your saying, but what if for arguments sake the 30 tickers on the DOW had 0 volume for a day. Does that mean that the YM is not allowed to trade or will have had 0 volume also? Futures may track an underlying index and in turn the underlying stocks...but it's a separate contract and trades as such, albeit somewhat harmoniously with the underlying issues.

 

Would there be many trading something where it's underlying had 0 volume, of course not but it could still have traded. The DJI on the other hand would have 0 volume because that's a raw index tracking those 30 stocks.

 

So I guess in another twist of convolution we need to separate futures, ETF's and raw indices? :doh: :o

[Rocky Mtn Trader 10]

I dont think we need to seperate anything.

 

The YM and the ES move almost identically with some minor variations. These variations are obviously in the different stocks that make up these indexes.

 

Notice that the ES trades 2.5 million contracts per day, while the YM trades only 250k contracts per day. Yet they both move up the same and down "proportionatly" the same. Ie., the YM moves 50 points when the ES moves 5 points. This is a very general term.

 

The sheer volume of the ES would cause it to move differently if the

"trading volume" had anything to do with its movements.

[MC 10]

I dont think we need to seperate anything.

 

The YM and the ES move almost identically with some minor variations. These variations are obviously in the different stocks that make up these indexes.

 

Notice that the ES trades 2.5 million contracts per day, while the YM trades only 250k contracts per day. Yet they both move up the same and down "proportionatly" the same. Ie., the YM moves 50 points when the ES moves 5 points. This is a very general term.

 

The sheer volume of the ES would cause it to move differently if the

"trading volume" had anything to do with its movements.

 

Interesting point. That goes to further show that they are tied together. That was kind of what I was going for when talking about open interest. Everything moves in relative terms, to its own past moves given the same volume and/or in relation to other markets and how they move on their relative volume.