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. How many times have you heard something like: Well, the reportcame out and it was bullish.I m going to hold my longs until the closeunless it drops off.I m moving my stop up to lock in a small gain.Ifwe are still higher into tomorrow I will stay long. Here the trader isin effect saying: I need time to reach my conclusion. Time is the key element to the trader, not price, because the pricecould still move more in the trader s favor over time.The traderneeds time to see if that will happen.As far as the market itself (themachine) is concerned, it only knows that once time passes, orderswill come in.And you won t get any orders without time.It doesn tmatter to the machine what the orders are or how the order flow isimbalanced or from which side; it only matters that time passes inorder for those orders to be created.VOLUMEOnce enough time has passed for traders, they do something, and thatresults in an order being placed.An order that is filled means a tradewas done.That is volume.Volume is a measure of how much activ-ity a particular market is seeing at a given point in time.Every orderplaced and filled means someone somewhere decided to participate.Now that traders have participated, we know how much activity themarket has.If there is little or no volume, that means few traders P1: OTAJWBT329-c03 JWBT329-Jankovsky July 9, 2010 11:15 Printer: Yet to comeThe Four Components of Market Structure 27are doing anything for some reason.That point too is importantto know.No activity = no volume.A lot of activity = high volume.Volume is a measure of how much of something actually is hap-pening.You need volume to tell you if traders want to execute intothe market.When traders are participating, that can only mean oneof two things: Either they are entering the market or they are leavingthe market.They can t do anything else.Orders can only be tradersmaking a conclusion that it is time to get in or it is time to get out.Volume or no volume means someone decided it was time to do ornot do something.OPEN INTERESTOpen interest is the answer to this question: Who is getting in or whois getting out? Open interest is a measure of how many contractsare still active in the market.If open interest is rising, that meansa group of traders have gotten into the market and they intend tostay in the market for a period of time.If open interest is falling, thatmeans traders aren t willing to stay in the market.In other words,open interest is a measure of confidence that a particular trade willwork or not work.It will take time to see that happen.There are a few things about open interest that are very impor-tant.Currently, open interest is calculated at the close of the day sbusiness in most markets.So if open interest is rising, this must rep-resent traders who intend to hold their trades at least overnight.Thatmeans they are at risk for something to change that might hurt theirtrades, and they are willing to let more than one day s worth of timego by in order to find out.They feel confident enough to accept thisrisk; otherwise they wouldn t hold overnight.These traders are notday traders; they are thinking something else that requires more time.This must mean they are experienced traders who know it takes timefor a trade to develop.Open interest is usually a reflection of the more educated, bet-ter capitalized, more experienced traders.Most of the time, theyare professional traders.Therefore, a rise in open interest suggeststhat professionals see opportunity and are willing to stay at risk to P1: OTAJWBT329-c03 JWBT329-Jankovsky July 9, 2010 11:15 Printer: Yet to come28 THE UNIQUENESS OF ZERO-SUM MARKETSget it.A drop in open interest likely means that professionals feelwhatever the opportunity was, the potential is likely dropping at thecurrent time.PRICEPrice is the last component of market structure and the least impor-tant.Of course, we as traders are trying to exploit a price change inorder to profit, but the price itself is not as important as how the mar-ket got to that price.Price is a reflection of where the market went toas the orders were processed.It is infinitely more important to knowhow it got there, who is behind the price change, how busy the mar-ket was to get to that price, and whether professionals are involvedto a large degree in the price change.To illustrate why price itself is not critical for the winner, con-sider this question: If you knew the order flow was about to change,and it was about to go heavy on the buy side, and that would likelybe in the next 10 minutes, would you buy the current price no matterwhat it was? Absolutely you would.It doesn t matter what the priceis when the order flow changes; it only matters that you are on theright side and slightly ahead of that change.Who cares at what pricethat order flow change happens? I just want to be slightly ahead of it.Think of price as being a reflection of the net order flow, not animportant thing in itself.You want to know the structure of the mar-ket behind the price in order to answer the question: Is the marketprice too high or too low?SYMBIOTIC MARKET STRUCTUREOnce you see all four of these components in market structure inproper relationship to each other, you can begin to see when a mar-ket is about to experience a change in the order flow.The change inthe order flow is inevitable because of liquidation pressure, which wecover in Part III.But before we move on, I would like to give you oneexample of how to see a change in the order flow develop by under-standing the big picture of market structure.Going back to the corn market for a moment, we know that thereare things that take time to discover that might affect the size of the P1: OTAJWBT329-c03 JWBT329-Jankovsky July 9, 2010 11:15 Printer: Yet to comeThe Four Components of Market Structure 29crop.No matter how you slice it, there will be bulls and bears in themarket who will conclude that the market is overpriced relative to thefinal information due later and those who conclude it will be under-priced.They both need time to see that information and make conclu-sions as they answer the questions What does this mean, and whatdo I do to profit?So we watch the corn market in the spring as the issue of thecrop size and other fundamentals develop.We notice that the price issteadily rising.That can only mean that buy orders are larger than sellorders.We notice that during this price rise, the open interest is alsorising, which likely means that professionals are involved and theyare likely on the buy side.We also notice that volumes are increasingeach day as the price rises.We now know that more and more traderswant to participate.We also know that the sellers are losing moneyand that part of the buy orders in the order flow are shorts buyingback their losing positions, adding pressure to the dominant force inthe market.At some critical price/time relationship (whenever that is), thebulls will decide that the opportunity for the price to rise farther isdropping and they will likely want to take their profit; that means sellorders will start coming in.We notice that as the price reaches theprevious yearly high (for example), the volume rises again, but thistime the open interest drops significantly.This can only mean thatthe winning bulls are leaving the market and the shorts don t wantto play anymore either; therefore, the traders who put the marketinto a high price are no longer there.Their previous order flow isn tthere anymore
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