In Mind Over Markets (1st ed. 1990) James F. Dalton, Eric T. Jones and Robert B. Dalton describe six types of market days repeatedly seen across all financial markets, but no two days are ever identical: "The labels we will give these patterns are not as important as understanding how the day evolves in relation to the initial balance and the confidence with which the other time-frame has entered the market. Think of the initial balance as a base for the day's trading. The purpose of a base is to provide support for something, as the base of a lamp keeps the lamp from tipping over. The narrower the base, the easier it is to knock the lamp over. The same principle holds true for futures trading in the day time-frame. If the initial balance is narrow, the odds are greater that the base will be upset and range extension will occur. Days that establish a wider base provide more support and the initial balance is more likely to maintain the extremes for the day."
The Initial Balance is traditionally defined as the price range of the first hour of the day, which is extremely important to professionals on the floors of the exchanges. They use the initial balance high and the initial balance low as important points of reference in order to facilitate trade between buyers and sellers.
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1. Trend Day
The Trend Day is the most aggressive type of market day. On a bullish Trend Day, the open usually marks the day’s low, while the close usually marks the day’s high, with a few ticks of tolerance in either direction. On a bearish Trend Day, the open will usually mark the day’s high, while the market will usually close near the session’s low. The market will typically start fast and the farther price moves away from value (roughly 70% of the prior day's range), the more participants will enter the market, creating sustained price movement on increased volume. Initiative buying or selling is responsible for this type of market day, as these participants are confident they can move price to a new area of established value. Price conviction is strongest during Trend Days.
Trend Days have the widest price range (high price minus low price), meaning it is costly positioning against the market or failing to recognize the pattern early enough to enter alongside the market. Trend Days only occur a few times a month, but catching these moves certainly makes money. The Trend Day is usually preceded by a quiet day of market activity, which is usually a day with a small range of movement (Toby Crabels NR4, NR7, ID - see HERE and HERE). However, rare as they are, a Trend Day is oftentimes followed by another Trend Day.
2. Double-Distribution Trend Day
While the Double-Distribution Trend Day is a trending day, it lacks the confidence or conviction of a Trend Day. Instead, this type of day is characterized by indecision at the start of the session. The market will usually open in a quiet manner, trading within a fairly tight range for the first hour or two, thereby creating a narrow initial balance.
If the initial balance is too narrow, price will break free from the range and auction toward new value, creating range extension, which is any movement outside the initial balance. After the initial balance of the Double-Distribution Trend Day has been defined, price will break out from the range and auction toward new value, where it will form a second distribution of price. This is the market’s attempt at confirming whether new value has indeed been established. The Double-Distribution Trend Day opens quietly, trading within a tight range. Eventually, price breaks free of the range and begins trending toward new value, igniting initiative buying or selling. Once the market finds new value, it then builds out another range before ending the day. The ranges formed at both the beginning and end of the day is where the term “double-distribution” comes from, as the bulk of the day’s volume resides at one of these extremes, essentially forming a double distribution of trading activity.
The initial balance is the base for any day’s trading but extremely important to the Double-Distribution Trend Day. A narrow initial balance is easily broken, while a wide initial balance is harder to break. The fact that the initial balance is narrow on this type of day indicates that there is a good possibility of a breakout from the initial range, indicating that you will likely see a move toward new value.
3. Typical Day
The Typical Day has a wide initial balance established at the outset of the day. Price rallies or drops sharply at the beginning, moving far enough away from value to entice responsive participants to enter the market. The responsive players push price back in the opposite direction, essentially establishing the day’s trading extremes. The market then trades quietly within the day’s extremes the remainder of the session. The opening rally or sell-off is usually sparked by reactions to economic news that hits the market early in the day. This opening push creates a wide initial balance, which means the day’s "base" is wide and will likely go unbroken.
4. Expanded Typical Day
The Expanded Typical Day is similar to the Typical Day in that it usually begins with early directional conviction. However, price movement at the open is not as strong as that seen during a Typical Day. Therefore, the initial balance, while wider than that of a Double-Distribution Trend Day, is not as wide as that of the Typical Day, which leaves it susceptible to a violation later in the session.
Eventually, one of the day’s extremes is violated and price movement is seen in the direction of the break, which is usually caused by initiative buying or selling behavior. The initial balance was wider than that of a Double-Distribution Trend Day, but not so wide as to challenge the width of the Typical Day. When the base of the day is neither wide nor narrow, it can be a coin flip whether a breakout will occur. The fact that the initial balance is not wide introduces the potential for failure at some point during the day at one of the extremes. In this particular case, initiative sellers overwhelmed the bottom of the day’s initial balance and extended price movement to the downside. Selling pressure essentially expanded the day’s range, thereby introducing the namesake for this type of day. The initiative selling pressure led to continued weakness the rest of the day, as price moved to establish lower. During an Expanded Typical Day, both the upper and lower boundaries of the initial balance are susceptible to violations. On any given day, one, or both of the boundaries can be violated, as buyers and sellers attempt to push price toward their own perceived levels of value.
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The last two types of days seem similar, but they have distinct differences that set them apart from each other. The Trading Range Day and the Sideways Day even sound similar, but the difference lies within the participation levels of both buyers and sellers.
5. Trading Range Day
A Trading Range Day occurs when both buyers and sellers are actively auctioning price back and forth within the day’s range, which is usually established by the day’s initial balance. The initial balance is about as wide as that of a Typical Day, but instead of quietly trading within these two extremes throughout the day, buyers and sellers are actively pushing price back and forth. Buyers and sellers will stand at the extremes of the day and will enter the market in a responsive manner when price reaches the outer limits of the day’s range. Responsive sellers will enter shorts at the top of the range, which essentially pushes price back toward the day’s lows, while responsive buyers will enter longs at the bottom of the range, which pushes price back toward the day’s highs. This pattern will continue until the close. A Trading Range Day offers easy facilitation of trade and gives traders amazing opportunities to time their entries.
6. Sideways Day
During a Sideways Day price is stagnant, as both buyers and sellers refrain from trading. This type of session usually occurs ahead of the release of a major economic report or news event, or in advance of a trading holiday. There is no trade facilitation and no directional conviction. This is a non-trend Day with a very compressed range, oftentimes an inside day, and the risk-reward ratio for day traders is not favorable. The initial balance is rather narrow, which at first indicates the potential for a Double-Distribution Trend Day. However, the initiative buying or selling required for a Double-Distribution Trend Day never enters the fray, which leaves the market very quiet for the rest of the session.
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| Jan Firich (2012) |
The market will typically alternate between high and low range sessions. The fact that the market rallies after the formation of a narrow value area causes the value area for the next session to be extremely wide. A wide value area will typically lead to a Trading Range or Sideways Day behavior. When this occurs, the initial balance is usually larger, as the market establishes the extremes for the day’s trading activity, which usually results in a Typical, a Trading Range, or Sideways Day.
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