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7 Initial Balance PDF
7 Initial Balance PDF
Initial Balance
Perspective: The Open
As the market opens we begin to receive day timeframe market‐generated information that we
build into our evolving market perspective. Are we opening in or out of the prior session’s
range? Do we see directional conviction at the open or are prices rotating back and forth? Is
price moving away from value, and if so we ask, will price be pulled back to value or will value
likely follow price? We begin to gauge the tempo and record the initial balance as it is
developing—in its range and its relation to recent value. We are cognizant of our references
and we observe price behavior around these, gauging for acceptance or failure.
These observations come together to help us determine what timeframe appears to be
dominating in the market. We can then choose, to the best of our ability, the most effective
strategy and tactics to capitalize on the two‐way auction process. For example, if we sense
short‐term participants dominating, we can lean on mechanical references such as overnight
high and low, prior session high and low, the open, prior session close and other short‐term
references. If we see directional conviction we consider that perhaps longer‐term participants
are dominating and we look to longer timeframe references and start to visualize the
possibilities given the bigger picture market perspective.
The Market Profile® updates in real time to convey these pieces of market‐generated
information and helps us to observe, in context, what is transpiring. In this article we will focus
on one element of this market‐generated information conveyed through the Profile: initial
balance.
We introduced this article with an overview of the real time thought process as the session
unfolds to provide context to the technical points that follow. It is our objective to not only
explain initial balance but more importantly, help you understand how it folds into other
market‐generated information to give you a holistic view that can protect you from getting
caught up in price moves.
Definition and Application
We discussed initial balance in Mind over Markets. At the time, we employed the concepts that
were introduced by J. Peter Steidlmayer in his original work from the late 1980s, adding
additional experience and observations up to the time the book was published in 1993.
We described initial balance as the price range resulting from market activity during the first
hour for most commodities and slightly longer for the S&P’s. We explained that the initial
balance represented the period of time in which the locals attempted to find a range where
two‐sided trade could take place. We noted that locals provide liquidity, not direction, by acting
as middlemen between the off‐floor traders. We used the analogy that the local is like the car
dealer—the middleman between the manufacturer and the consumer—with the goal to move
inventory quickly and make a small profit on each sale. Of course the local is no longer a player
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as floor trading has moved in a large part to electronic trading; however its function to provide
liquidity is very much the same albeit in a different form.
Initial Balance with Regard to Day Types:
1. Normal day—we now refer to this day type as a Primary day—where the wide initial
balance contains the extremes for the day. These days are more the exception than the
rule.
2. Variation of a Normal, or more current, Primary day—where the initial balance in the
early session is less dramatic. Later in the day this narrower initial balance experiences
range extension on one extreme as a longer timeframe enters the auction.
3. Double distribution trend days—the initial balance forms a ‘narrow base’ in the early
session reflecting a low level of conviction or said another way, a price area where two‐
sided trade is taking place. Buyers and sellers are in agreement to the fairest price to
conduct business. The narrower this base is, the easier it is to overwhelm it; as a longer
timeframe enters the auction, prices are driven to a new level, establishing a different
value area later in the session.
4. Non‐trend day and Neutral day—we now refer to these day types discussed in Mind
over Markets under one category as a Balanced Day—this day is similar to a double
distribution day in that the base is narrow, but prices stay contained and the range is
never extended. These days tend to develop before the release of a big economic
number or announcement. They signify a market that has come into balance and/or a
market awaiting more information.
Trend days: Initial balance has little relevancy when this day type unfolds. Actually, it is not only
irrelevant, but employing initial balance on trend days can actually hamper your ability to
execute. On a day when there is directional conviction at the bell with an opening drive that
begins to one‐timeframe higher, initial balance is of little use and can divide your attention
from observing the most important market‐generated information of the auction.
Rotational days: Initial balance is helpful on rotational days that have considerable overlap with
the prior session. As we discern what timeframe is dominating we can use the initial balance to
determine good trade location and areas to gauge for auction acceptance or failure. In these
environments, initial balance provides early session information to begin to understand what is
occurring in the auction.
Over the years some service providers have attempted to adapt the information in Mind over
Markets as a basis for statistical, linear measurements to quantify initial balance, using
averages, ranges extensions from it and other computations to create tactical buy and sell
signals. We introduced this article with an overview of an unfolding session to express why we
find such approaches compartmentalized and ultimately limiting in one’s ability to trade
successfully over the long term. Initial balance is a practical tool to help you assimilate market‐
generated information into your evolving market understanding and subsequent strategy
formulation. However it is most effectively employed when it is considered in context with
other developing dynamics in the market.