Robin Mesch considers Drummond Geometry and Market Profile to be "extraordinarly powerful tools for trading" and uses both in her analysis.
futuresource.com
By Allen Sykora
Robin Mesch uses two methods of analysis for her trading, Drummond Geometry and Market Profile.
Drummond Geometry, developed by Charles Drummond, is based on the premise that markets are geometric and that energy is the driving force behind market movement. By taking the vertical price bar of any two consecutive periods, the Drummond method projects energy into the future to determine support and resistance.
Market Profile, developed by Peter Steidlmayer, is a method based on volume. By looking at how much time a market spends at a given price, one can determine where market participants believe value has set up in the market.
"Both systems are extraordinarily powerful tools for trading," said Mesch. "The first utilizes only the vertical activity bar. The second, which captures both the horizontal and vertical activity, is what is called a two-dimensional database."
Mesch runs Mesch Capital from Portland, Ore., where she manages an in-house account and writes the market letter, Trading Prophets, which focuses on the U.S. 30-year Treasury bond. She is a frequent contributor to CNBC, hosts seminars for traders and conducts one-on-one mentoring over the Internet, utilizing the forms of analysis she relies upon for her own trading.
Drummond Geometry calculations are derived from the "two- period bar." The volatility, expressed within two consecutive bars, is extended into the next period to project future areas of energy termination. Mesch will look at the range for any two periods, such as successive days, quarters or even years.
"By taking points off two consecutive bars, Drummond has created a two-period line," she explained. "There is a series of moving averages and projections from those bars that creates support and resistance. With the use of multiple timeframes, I look for convergences of support and resistance. Through a methodology of determining what type of trading the market is in, you can calculate both direction and targets, as well as come up with criteria for knowing if you are wrong."
But the use of a one-dimensional database, based on only the vertical bar chart, is not enough, explained Mesch. A one- dimensional database "doesn't discriminate between two identical patterns in terms of which one is going to 'move' and which one may go against you. Any vertical-based system requires a tremendous amount of subjectivity and 'the you factor' comes into play to a great degree. Steidlmayer's system takes information off what's called the market internals, not the market externals."
For instance, on the day Mesch was interviewed, 113 20/32 was widely recognized as a resistance level for the December Treasury bond futures.
"But what that (vertical) system can't tell you is when it hits 113 20/32, whether there's going to be a strong pullback or one that is short-lived," she said. "It may hold the market for 15 to 20 minutes, or you may only have two minutes to figure out if you're right. In other words, a one-dimensional database doesn't tell you how much time you have in that trade."
Enter Market Profile, which includes volume--either actual volume or a close estimation of volume by using price over time--for help with the "internals of the market."
"This method may not be as good in determining support and resistance, although it continues to get better and better as more studies are created," said Mesch. "But Market Profile, especially with real intraday volume that is most recently being generated by the exchanges for the purposes of Steidlmayer's software, gives traders the internals of the market. Volume gives the market's language a new dimension because you are no longer just hearing a bunch of words, which is comparable to price.
"With volume, inflection is attached to each price, which brings meaning to the words," Mesch continued. "One can determine the actual strength and directional orientation behind the price. This method can discriminate between moments when one should trade price or trade direction."
Many traders are worried about the timing of their entry, related Mesch.
"Profile is less concerned about that. The aim is to recognize opportunities or where the advantage is in the market. Those are greatest when a market is about to distribute. If you can get on board before the distribution phase of the market, then entry price is less of a concern.
"It would take a lot to turn around a high-volume move versus a low-volume move. If you buy in an area that has been backed by a lot of volume buy dollars, it would take a lot to turn that around. Volume tells you how long you have in that trade and what kind of expectations you have in that trade."
As the market approached the resistance level of 113 20/32 on the day of this interview, Mesch noted, some selling came into the market. "You had some time in that trade, but you didn't have a lot if you were just going on support and resistance. But what the volume numbers told you was something completely different. The day before the (most recent) employment number, volume picked up and the bulk of the trading was between 113 24/32 and 113 30/32. There was a 64% increase just above 113 20/32. That was telling you the consensus of the market was to go higher."
She spoke about four hours before the close on this particular day, and the market held above that level, with the contract closing at 114 6/32. The next day it exploded to the upside toward 115 even.
As an example of the importance of volume in determining the strength of any price level, Mesch made an analogy to hosting a social gathering.
"You have your food and you have your caterers. Everything is prepared and the guests are coming. To turn that around, it's going to take more than the meat being a little undercooked or one of your guests getting sick. Somebody will have to die at that party to completely destroy the event.
"Volume is kind of like that. Say over 113 20/32, you weren't getting a big pickup in volume....Say the volume was little, like only a 1% increase. It wouldn't take much to turn that around.
"But if you have a 64% increase, which no vertical bar chart can really tell you, it's going to take a lot to turn that around. So if you think the market is going up, you can stay in that trade. You can buy it and hold it to see whether volume will dry up and you know what kind of time you have to determine the validity of your idea. You would have to have a huge amount of selling orders to turn around a 64% increase in volume."
On this particular day, the buying volume was beginning to dry up as the T-bond contract approached the 114 31/32 area. "You were balancing out that buying, finally," she said. "So it really gives you a crystal-clear understanding of the market internals--the buying orders and selling orders--that drives the market."
She feels strongly that traders should look at a database other than simply trading off a high, low and closing price, as many do.
"It's OK to use that, but they're not trading the right database, which would be incorporating the vertical and the horizontal," she said. "The vertical bars are price-oriented and external to the market. You need to get a database which is internal to the market, and that is what the volume dollars are doing--the buy and sell orders.
"If you don't have that, you don't have a chance."
Early in her career, Mesch traded a wide variety of markets before she began focusing on the bonds. "Happenstance drew me to bonds," she continued. "I was offered the opportunity to write an in-house market letter for a large financial institution, so for five years, I was specializing in the bonds. To do that, I needed to learn how to trade it and everything about it. So I settled on it."
She later took over this business, which she still runs today. Her company's services are outlined on the web site www.robinmesch.com, or by calling 503-224-9033.
Mesch said she feels fortunate that early in her career, she was able to spend some time working with the originators of the technical methods she uses--Drummond and Steidlmayer.
"Both men who developed these methods of analysis are truly brilliant thinkers," said Mesch. "Charles Drummond has been my touchstone throughout my trading and analytical career. What an authentic human being. Steidlmayer too. His work is going to turn the industry upside down."
Mesch's career in the markets began in a roundabout way when she was working in an office, mainly filing papers, while she took some time off from college. Her employer offered to help her learn about markets so she could help him with his trading.
"He had gotten into the futures by accident, made a ton of money and thought it was the easiest thing in the world, then proceeded to lose all of his money," she recalled.
This individual obtained manuals of Drummond's work and sent her to one of his seminars. She and a friend ended up doing some computer-programming work for Drummond. She met Steidlmayer while taking a week-long course from him, which initiated their 15-year association.
"I've had some good teachers," Mesch said. "When I met Charlie Drummond, I could tell he was brilliant and that his creation of the Drummond method was foundational work in the field. It works and he was willing to teach it. It's the same with Pete Steidlmayer. He's really ahead of his time. He has made a major contribution to the industry.
"I think you can often judge a system by the person who's behind it. I always felt what I was studying had value and was true because of the integrity and authenticity of the developers."
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