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Trading Education Article 65 - POOR HIGHS AND LOWS AND EXCESSIVE

BUYING AND SELLING TAILS

The following discussion is a result of the knowledge and trading experience I have
accumulated since my introduction to the Market Profile in 1987 and the publication of
Mind over Markets in 1990. The purpose of the article is to provide you with a broader
background under which to observe poor highs and lows as well as excessive buying
and selling tails; once you have this broader background the process of accumulating
your own mental database begins.

IN THE BEGINNING The initial introduction to buying and selling tails appears to be
one of the greatest trading discoveries ever made, so simple and so reassuring; so
linear. There isn’t a single worthwhile concept that cost me more money when I initially
began using the Market Profile than buying and selling tails.

THE ORIGINAL CONCEPT

A buying or selling tail demonstrates:
1. Excess or confidence by a timeframe that is beyond the day timeframe. I have
made the following two modifications over the years:
a. The “other timeframe” is only assumed when the tail occurs outside of
the previous day’s range or,
b. If the tail develops within the previous day’s range, it is only assumed to
be from a longer timeframe if the market continues, with confidence, to
extend beyond the previous day’s range.
2. The lack of a buying or selling tail—a poor low or high—demonstrates non
completion of the current auction. Originally it was assumed that the odds
were high that prior to the close a poor high or low would be eliminated before
the daily auction was completed. Any opposite intraday reaction away from
the poor high or low presented a high odds opportunity of seeing price return
to and through the original poor high or low.

NOTE—We now understand that a non-completed auction reflected in a poor high or

low is only one data point. Two or more non-completed auctions or poor highs or lows in
succession produce an exponential effect that these poor highs or lows will be taken
out.

BUYING AND SELLING TAIL EXCEPTIONS FALL INTO TWO CATEGORIES:

1. Tails that are too long.

2. The lack of buying or selling tails.
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1. TAILS THAT ARE TOO LONG

When tails are too long it is very

ery often a sign that the tail developed as the result of an
emotional knee-jerk reaction;; the market is more likely to balance for the remainder of
the session. A reversal which fills in the tail can also occur.

The example below of the S&Ps from August 2, 2012 – August 16,, 2012 shows two
examples of such knee-jerk jerk reaction
reactions within nine days. *Note—these
these tails weren’t filled
in for three sessions;; this emphasizes the importance of carrying information forward.

When analyzing tails that are too long

long, context is always important:

1. Is the tail with or against the current auction or trend;; balancing or reversals
occur more often when they are against the current auction or within a well-well
defined trading range
range.
2. Reversals or balancing are less likely when the tail forms at or through an
important breakout level.

TAILS THAT ARE TOO LONG

LONG—RECENT EXAMPLE

Day
Three

Example
1

Example
2

Day Two
following
the
selling
tail

1. Example 1 shows a tail on August 2nd with continuation in the direction of the
tail during the pit session
session. The next session recovered approximately half of
the tail with completed recovery on the third day.
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2. Example 2 showed a 50% recovery in the current session and the next with
total recovery and upward range extension on the third day following the tail
being created.

IMPORTANT NOTE—Tails are excess regardless of the timeframe in which they are
formed. The taking out of a pre-existing tail (excess), no matter if it had existed for
minutes, an hour, a day, or longer is significant. Similar to a balanced situation, the
longer the tail—excess held, the more significant the removal of that tail.

2. A LACK OF A BUYING OR SELLING TAIL—This is the most complex and

ambiguous area associated with tails.

I. Poor lows are often associated with markets that have gotten too short; nervous
shorts grasp at a return to an earlier low to cover. We have all been there where we
recognize an opportunity to take advantage of a pullback to an earlier reference or
an earlier low to cover. Unfortunately, we also remember those times when we
bypassed this opportunity.

NOTE—When this has occurred, you need to learn to shake off the lack of a buying
tail as the lack of the buying tail may in fact be your indication to go long.

ADDITIONAL NOTE—Laggard short sellers have also likely contributed to the

inventory imbalance.

It is much easier to navigate these perilous situations if we continue to think in terms of

context; markets go through a process prior to becoming too short. For example;

1. Tempo—may have been slow and grinding as the auction attempts to

probe lower.
2. Rotational environment—the auction may be been in a tight range
where traders were selling every rally without getting much downside
follow.

II. Poor highs are often associated with markets that have gotten too long;
uncomfortable longs grasp at rallies to previous highs to liquidate their long
positions. In many cases these rally levels are to earlier highs. Other traders
watching price go higher perceive that there is less risk and go long; however, as the
inverse of being too short was described, lack of follow through often causes these
positions to be liquidated.

1. Tempo—may have been slow and grinding as the auction attempts to

probe higher.
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2. Rotational environment—the auction may be been in a tight range

where traders were selling every rally without getting much downside
follow.

Whether the market is getting too long or too short, appreciating the surrounding context
will allow you to recognize situations that are precursors to out of balance inventory
conditions. You will then be in a position to ready yourself and capitalize when the
counter auction gets underway.

III. Poor highs and lows are more common on very slow days that are mostly dominated
by very short-term timeframes; it logically follows as these traders very often
automatically buy at earlier lows and sell at earlier highs. This is often a learned
response from floor trader habits; these habits are often passed on to younger
traders. It is also innately intuitive to buy below value and sell above it.

The most common market conditions for poor highs and lows will occur on balancing
days or on very low volume days; the low volume is an indication that the longer
timeframes are absent.

POOR HIGHS OR LOWS ON TREND DAYS VERSUS ROTATIONAL DAYS

TREND DAYS—Two considerations;

TAILS

1. The initial low on an uptrend day and the initial high on a declining trend day. *A
more normal trend day will have an initial buying or selling tail in the direction of the
trend; don’t out guess yourself, just go with the tail.

It is not uncommon for a trend day to be triggered by inventory that is either too long
or too short; where the trend ‘morphs’ to the next longer timeframe as the auction
gets legs.

a. The short covering or long liquidation may be evident from the opening bell; in
these instances it may initially appear as a typical trend day marked by a
buying or selling tail.

*When the driving force is an inventory imbalance the trend day will often be
too stretched out or too ‘thin’. This is in comparison to more ‘wave like’
institutional buying or selling that sees the market breakout then settle and
then continue in the direction of the trend; this process may several times
throughout the session.

LACK OF TAILS—POOR HIGHS AND LOWS ON TREND DAYS

b. The more difficult ‘inventory imbalance trend day’ occurs when the
trend follows either a poor high or low. For example, a trend day up
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after a poor low is made. A contextual understanding of the prior

trading sessions should alert you to the possibility of an inventory
imbalance; the potential scenario should have been identified in your
preparation.
2. Once the trend day is underway it is likely that there will be numerous
occasions that deliver a poor high or low in the direction of the trend; it is rare
that these poor highs or lows exist for the rem
remainder
ainder of the trading session. In
most cases the counter auct
auctions
ions following the poor high or low present
opportunities to get aligned with the trend.

Inexperienced traders often get caught in exactly the wrong position as these
situations develop. Partly because thehe counter auction following the poor high
or low is often very deceptive as it occurs very quickly; the speed of the
counter auction has a tendency to quicken your pulse leading to an impulsive
trade in the wrong direction.

S&P
S&PS AUGUST 22, 2012 – AUGUST 29, 2012

1. Poor low—likely
likely the result of inventory being too short in the day timeframe.
timeframe
2. Poor high and pullback.
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3. Upside continuation following the pullback low.

POOR HIGHS OR LOWS ON ROTATIONAL DAYS

The difference between trend days and rota

rotational days is one of confidence:
confidence the higher
the confidence, the greater the odds that poor highs or lows, in the direction of trading,
will be taken out.

On rotational days that have left a poor high or low, in the direction of the short-term
auction or longer-term, the poor high or low is often taken out during one of the final
thirty minute periods.

The following example, which demonstrates this point, occurred as I was finishing the
article on Friday, September 7, 2012 in the S&
S&Ps.

S&P
S&PS SEPTEMBER 7, 2012

Poor
High

1. The trend is up. The market has made new multi

multi-year
year highs in the last few
days.
2. There is a poor high at 1436.75 that last until the 3:30 – 4:00 pm ET P period
auction.
3. There was a late liquidation to halfback that shook out the weaker longs;
following this liquidation break the market took out the remaining poor high.
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When a poor high or low on a rotational day is not taken out, the odds of that high or low
being taken on the following day are high. As I have previously discussed, two back-to-
back poor highs or lows increase these odds exponentially.

TWO BIG MISTAKES ON TREND DAYS

1. Not going with the trend; on the surface it may appear too risky as you may
be paying 10 for something you could have bought for 5 on last night’s close.
Going for perfection or laser type entries can be a killer and keep you out of
the move. Remember that a trend is a total reordering of the market’s
thinking; last night’s price is forgotten by the market. You have to forget it
also. Rotational strategies can be very costly when employed during trend
days.

2. Fading trend days also produces high odds of failure; poor highs or lows are
often responsible for fading a trend day. On a trend day to the upside, for
example, a poor high appears to be a good place to short as the market has
slowed and begins to retreat. In fact, the initial retreat from the high may
appear to be real selling as the retreat is very quick; the quickness of the
move is likely nothing more than short-term liquidation. Once the short-term
liquidation is completed the market often turns back up and easily takes the
high. (Traders who fade these trend days are often fueling further upside
auctions as their shorts then have to be covered, i.e. buy to cover).
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The best strategy on a trend day is to either leave it alone once you are on the trend or
take profits
fits on the rally, if it is a rrising trend, and repurchase on breaks.

Just because it is now 20 and it was 5 earlier doesn’t make it a better sell at the
moment. In n fact, the larger the move
move, the more timeframes that may want to get
involved in the direction of the trend. Some of these may be covering shorts (old
business), while other participants are getting long (new money) as higher prices are
bringing in bids.

SUMMARY

Buying tails, selling tails, buying tails that are too long, selling tails that are too long, as
well as poor highs and lows all reveal important market-generated
generated information.
information
Constantly observing these conditions build builds your accumulated mental database, or
said another way, your experience.