Before I delve into today’s topic, I’d like to tell you of a great bonus to my readers. From time-to-time, I’ll post the Camtasia file of my trading diary in order to illustrate a point. The idea of using Camtasia as part of my journal came from Dr. Brett Steenbarger (http://traderfeed.blogspot.com/). Thanks Dr. Brett, this is one of the best ideas that have come across my desk.

How do I use this idea? I record my thoughts on Camtasia as I trade and then review the day and create a written summary. That way, my record of the trade is not influenced by the vagaries of memory.

You can view my Cam file for March 04 2008 at http://www.tradingsuccess.com/stcuser/market-profile/03-03-2008/mp.html. One point: when the market moved in the K period, I must have forgotten to press F9 because I don’t have a recording of the last 90 minutes.

As you will hear in the Cam file, I was concerned at the lack of thrust down on the breach of 1310 and the failure to develop a trend day range. When in the K period, the market started to rally, I decided firstly to exit the shorts executed 1319. And when it was clear that the market would close above 1310, I closed out all shorts at 1323.25

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Most books on the Market Profile state that the Initial Balance is the first two 30-minute periods. The authors calculate these periods from the start of the session. I take the view that this practice does not achieve the outcome for which the Initial Balance was designed.

To understand why this is so, we need to go back to the original ideas of Peter Steidlmayer.

When he first wrote about the Profile, all markets opened at a half hour either at the ‘30′ or at ‘00′, Peter took the view that the range of the first 60 minutes was set by the day timeframe trader i.e. those that initiated and closed out trades on the same day. The range after the first 60 minutes was set by the other timeframe trader (anyone not a day trader). He then based the Day Type, Open type, etc around this distinction.

The Initial Balance for the ES was always one surrounded by controversy. Initially it was set at the K period - recognizing the schizophrenic nature of the ES. Often the market changes its nature in the ‘K’ period. Dalton published research in his newsletter that showed the superiority of using the first 90 minutes of ES trading as the Initial Balance; the K period was a period to watch for reversal of the intra-day trend or an acceleration of the intra-day trend.

Prior to this research being published, the financial markets started opening minutes before 7:30 (CT); for example Bonds opened at 7:20 am (CT). The question that arose was whether the 60 minutes should be measured from 7:20 or would it be better to treat the 7:20 to 7:30 as a 30-minute period. Most publications opted for 7:20.

I took a different tack. I asked myself if the other timeframe trader came in because 60 minutes had expired or because of the time e.g. in the Bonds, did he come in because it was now 8:20 (because it was 60 minutes from the open) or did he come in after 8:30 (because it was 8:30 - whatever the reason). Using Peter’s ideas that Range Extension and Extremes are created by the other timeframe trader and that by measuring these parameters we could derive an idea of future direction, we tested the two time periods for robustness.

We found that treating a time period i.e. 8:30 am (CT) as the time the other timeframe trader commenced his activities was a more robust indicator of a market’s direction.

So for this reason, I use the first three 30-minutes for the ES and where the market does not open at the ‘30′ or ‘00′. Using the correct Initial Balance is not a matter of academic interest. You will have very different results e.g. whether or not you have a 3i Day depending on what standard you use. In turn, the differences have a material impact on your bottom line.

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BTW: a 3i Day is a Free Exposure trade i.e. a trade where the worst result is usually a scratch trade if you act in the Initial Balance of the day following the 3i day.

Another free exposure trade is the Neutral day closing in the Upper or Lower quartile of the range. For example, the March 4 day ended up being a Neutral Day closing in the upper quartile. This gives us a free exposure to the long side in the 1st 90 minutes of trading today.

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