This article covers Dalton’s detailed framework for market references as developed in Markets & Momentum. It begins with the psychological basis for anchoring (Kahneman/Tversky), then presents the full taxonomy of static and dynamic references, explains how to use references to identify who is controlling the market, and covers the concept of carrying information forward. This is primarily an explicit learning framework that becomes implicit through experience.
- Part I: Anchoring and Subconscious Bias
- Part II: Reference Taxonomy
- Part III: Who Controls the Market
- Part IV: Carrying Information Forward
Part I: Anchoring and Subconscious Bias
The Anchoring Effect (Markets & Momentum)
Daniel Kahneman (2002 Nobel Prize, behavioural economics) and Amos Tversky identified the anchoring effect: people select a reference point, then behave as if it is real and permanent, even when it is arbitrary. The price tag 100. Ancient brain circuitry releases reward chemicals. The trader is swayed without knowing it.
For traders, anchoring manifests as:
- Fixating on an entry price as a reference for whether to exit
- Treating yesterday’s settle as the “true” price against which today must be measured
- Assuming round numbers (4,000, 5,000) are meaningful just because they are round
- Using a price from weeks ago as the “right” level even as value has migrated away
IMPORTANT
The goal is not to eliminate reference points but to recognise when you are being unduly influenced by an irrelevant or outdated one. “The key is to realise when you’re doing it, let it go, then get back to the market-generated information.”
Oversimplification Bias
Over-reliance on any single reference creates oversimplification bias: the trader becomes so focused on one price level that they miss the complex, shifting context surrounding it. This is the gorilla experiment applied to trading: when the brain is tasked with watching one thing, it ignores everything else, even things that are plainly visible to an objective observer.
References provide insight into who controls market behaviour. They should be used as tools for reading context, not as mechanistic targets.
Part II: Reference Taxonomy
Static vs Dynamic References
Static references will not change once set. Dynamic references evolve continuously with market activity.
Static References
| Reference | Definition |
|---|---|
| Previous day’s settle | The official price published by the exchange at end of session. The most emotionally charged static reference. Change is measured from it. |
| Last trade | The exchange-reported last trade of the session. Significant when substantially different from the settle. |
| Previous day’s high and low | Identifies when meaningful change has or has not occurred. |
| Half-back (previous day) | Midpoint of the previous day’s range. A reference that, when respected, often signals short-term traders are dominant. |
| Overnight high and low | Reveals change (or lack of change) relative to overnight activity. |
| Overnight half-back | Static midpoint of the overnight session. |
| Previous weekly/monthly/yearly highs and lows | Key longer-term levels watched by multiple timeframes. |
| Moving averages (50-day, 100-day, 200-day) | Widely followed by institutional participants. 200-day MA garners investment attention. |
Dynamic References
| Reference | Definition |
|---|---|
| POC (Point of Control) | Fairest price at which business is being conducted. Migrates during the session. Direction and pace of migration are informational. |
| Trend day rally highs / pullback lows | Late afternoon pullback low on an upward trend day is a key next-day reference. If price stays above it, no meaningful change. If accepted below it, change is occurring. |
| Gap high and low | Open above previous day’s high = gap high; the gap level becomes support or resistance depending on follow-through. |
| Balance area extremes | Highs and lows of an established trading range become key references after a breakout. |
| Spike levels | Top/base of a spike becomes short-term resistance/support for the following session. |
Unique Dalton References (Appendix A)
These references are specific to Dalton’s observations over 50 years:
| Reference | Definition |
|---|---|
| Half-back from current and prior 30-minute bar | When traders are visibly reacting to this level, it signals the shortest timeframes are in control. |
| Late afternoon pullback low (upward trend day) | Remaining above in following session = no meaningful change. Accepting below = change. |
| Late afternoon rally high (downward trend day) | Mirror image of the above. |
| Weak high or low | High or low within a single tick of a recent identifiable reference (previous day’s high/low, overnight high/low, or any obvious mechanical reference). Signals low conviction, higher odds of being revisited. |
| Excess high or low | Confirmed by at least two single-print TPOs. Signals aggressive rejection. Absence of excess = ambivalent market, higher odds of revisit. |
| The nuance | A high or low can simultaneously be both an excess high (two single prints) and a weak high (within one tick of a prior reference). This dual classification further reduces continuation odds. |
Part III: Who Controls the Market
The Timeframe Identification Framework (Markets & Momentum)
References are not just price levels. They are tells about which type of competitor is in control. This is one of Dalton’s most important practical contributions:
IMPORTANT
When the market is constantly being contained by easily identifiable references (previous day’s high/low, settle, half-back), the odds are high that trading is being conducted primarily by short-term, day-timeframe traders. They react mechanically to visible levels, have limited staying power, and will eventually be replaced by longer-timeframe participants.
When the market plows through easily identifiable references without hesitation, one of three things is occurring:
- Longer timeframes are active (genuine new-money buying or selling)
- Short covering
- Long liquidation
- Some combination of all three
The Half-Back from the 30-Minute Bar as Tell
This is the most granular timeframe indicator Dalton uses. When a market consistently finds support and resistance at half-back relative to the prior 30-minute period, the shortest day-timeframe traders are in control. Their executions are mechanical and their entries are exacting.
When this reference is ignored, it is a strong signal that either a longer timeframe or a structural event (inventory extreme, news) is driving the move.
Institutional vs Individual Flow
Institutions exhibit patience. Their order flow unfolds gradually over extended periods. They go to great lengths to hide intentions that would allow short-term traders to front-run them. If an institutional order is impacting the market, “they prefer it to be slow, gradual, and imperceptible.”
Individual/short-term traders are more susceptible to emotional influences and rapid reversals. Their executions cluster at obvious reference levels.
| Signal | Likely participant |
|---|---|
| Activity clustering precisely at half-back, settle, or previous day’s high/low | Short-term day-timeframe traders |
| Market absorbing reference levels and continuing | Longer timeframes entering at those levels as locations |
| Rapid acceleration through multiple references | Liquidation or short covering driven by inventory extremes |
| Slow, consistent directional move that barely disturbs intraday structure | Institutional new money (most impactful; hardest to detect) |
Systematic/Algorithmic Programs
Computer-based programs (CTAs, hedge funds, family offices) often trigger at exact references. Dalton observes they are most potent in three scenarios:
- Markets searching for a low
- Markets searching for a high
- Trend continuation or acceleration
Once these programs are underway, they can continue for days. Their executions often begin at precise levels (prior daily high/low, current day’s half-back, the settle), then extend well beyond that reference.
Price Risk vs Location Risk
Most traders think of risk only in terms of price (how far will I lose?). Dalton introduces location risk as an equally important dimension:
- Approaching a major reference (yearly high, bracket extreme) = high location risk even if price risk appears low
- Being at a location where the market has repeatedly reversed is location risk
- Breaking out from a well-defined balance area at a major level reduces location risk for the trade in the breakout direction
This distinction allows experienced traders to reduce position size when approaching a major reference, then re-enter after the reference is cleared, at lower overall risk.
Part IV: Carrying Information Forward
The Concept (Markets & Momentum)
Key references do not expire at the end of the session. They must be carried forward to future sessions. A non-excess high from three weeks ago remains a relevant reference when price approaches it again.
The challenge: “It’s not uncommon for the earlier shorts to miss the meaningful break as FOMO has done them prior to the downturn.” Traders who forgot the non-excess high from three weeks ago will be caught off guard when price finally resolves through it. Carrying information forward is the mechanism that prevents this.
NOTE
“The first thing I do after the market closes is review the monthly bar chart.” Dalton’s daily preparation ritual starts at the highest timeframe and works down, precisely to maintain the widest possible context for carrying forward key structural information.
Near-Term vs Longer-Term Reference Segregation
One of the most common errors is allowing old references to clutter present-day analysis. Dalton recommends active segregation:
- Identify references most likely to be tested in the near term
- Set aside references that are unlikely to be relevant today or tomorrow
- Maintain the ability to retrieve longer-term references when price approaches them again
Failure to segregate results in “confusion ruling the day” as the trader attempts to reconcile too many reference points simultaneously. Chunking (see learning-and-intuition) reduces the cognitive load of managing multiple reference layers.
The Morning Preparation Sequence
Dalton’s opening ritual, derived from reference management:
- Review monthly bar chart first (broadest context)
- Review weekly bar chart
- Review daily bar chart
- Review recent Market Profiles
- Determine trending or bracketed
- Identify key references to monitor: previous day’s high/low, settle, half-back, overnight high/low, any non-excess levels, any balance area extremes
- Note what did NOT happen previously: non-excess levels, unfilled gaps, incomplete auctions
IMPORTANT
“The closer the market opens toward the centre of the previous day’s range, the greater the odds that the market will be rotational.” Opening within the previous range and near centre signals balance continuation. Opening outside the previous range signals potential directional activity. This single daily observation sets the initial frame for the entire session.
References Must Match the Trader’s Time Horizon (Flow Horse)
Flow Horse adds a useful constraint to Dalton’s reference work: the trader must not overload the chart with references from timeframes that are irrelevant to the trade they actually plan to hold.
- a scalper should prioritise the references that can shape the next one to three hours
- an intraday trader can give more weight to daily session references and nearby higher-timeframe extremes
- a swing trader can care much more about weekly and monthly structure
This sounds obvious, but it prevents a common failure mode. Traders often use excellent references from the wrong horizon, then wonder why price respects them in theory but not in the life of the trade they actually took.
References Are Also Search Filters (Flow Horse)
Another useful Flow Horse refinement is that references help answer “where should I look?” before they answer “what do I think?”
In practice, a strong preparation process uses references to:
- eliminate dead zones where no edge is likely
- focus attention on levels where trapped positioning or liquidity concentration may matter
- identify which market or instrument is worth watching today
- avoid turning every visible level into a tradable idea
That is a cleaner use of references than treating them as a checklist of mandatory trades.
The newer text also supports using alerts as “appointments” around these references. The point is not just to mark levels. It is to avoid burning attention equally across the entire market when only a few reference zones are likely to matter.
Sources
- Jim Dalton, Robert Bevan Dalton, Markets & Momentum (Wiley, 2025)
- Appendix A: Reference Definitions
- Flow Horse, Structuring the Trading Process pt. 1