Jerry,
Went through the videos...very nicely done thank you for posting!
Its starting to sink in a little better, couple points if you could confirm are correct for me:
1) Your definition of trend is price in relationship to the
VWAP.
Price above
VWAP the trend is bullish
Price below
VWAP the trend is bearish
2)
PVP in relationship to the
VWAP tells you what kind of distribution you are looking at.
VWAP above the
PVP tells you we are currently in a positively skewed distribution to the long side
VWAP below the
PVP tells you we are currently in a negatively skewed distribution to the short side
VWAP close to the
PVP tells you we are currently in a symmetric distribution.
If the above statements are correct, I have a couple of questions.
1) My thinking is that skewed distributions tend to indicate trend movements and symmetric distributions
tend to indicate reversions to the mean or a congestion type of environment. This is of course only relevant
to the current situation as the
VWAP and
PVP relationship can change in the future.
2) It would make sense to me that overall bias (whether you want to take long trades only or short trades only)
would be determined by the
VWAP/PVP relationship. Assuming that looking at the volume histogram gives you a pretty good idea that the current bias is not going to change soon:
A) If the
VWAP is above
PVP you should only be looking for longs (assuming that current bias stays the same). This is regardless of location of price. If price is above
VWAP you are trading with trend. If price is below
VWAP you are trading counter trend.
B) If the
VWAP is below
PVP you should only be looking for shorts (assuming that current bias stays the same). This is regardless of location of price. If price is above
VWAP you are trading counter trend. If the price is below
VWAP you are trading with the trend.
C) If the
VWAP/PVP is close it is a big assumption that current bias stays the same unless price moves rapidly back towards the
VWAP. So when in a symmetric distribution it seems to make sense to me that you would only trade at 2nd and 3rd
SD's for safety reasons in expectation of a move back to
VWAP. However, it must move quick or you will not continue to have
VWAP/PVP close (symmetric distribution).
Given the above, the first trade on the YM does not make sense to me. We are in a symmetric distribution, why short at the 1SD below
VWAP expecting a move to 2SD. If you expect the symmetric distribution to hold, then you are not trading with that expectation. It is more probably to get a move back to
VWAP and other side of distribution, then to extend further against the
VWAP toward 2SD and 3SD. The only exception would be if you are expecting the
VWAP to continue down below the
PVP and quickly turn into a negative
skew.
You have given examples of 3 main types of trades:
1) Trading a positive/negative
skew (non-symmetric distribution) in direction of the trend (defined by relationship of price and
VWAP) with risk tolerance and scaling in. This one makes sense to me.
2) Trading a breakout at
PVP against the
skew in a non-symmetric distribution in direction of the trend (defined by relationship of price and
VWAP) without risk tolerance (using tight stops and quick breakeven) makes sense to me because you are trading against the
skew (which could change in the future) but you are trading with the trend.
3) Trading a symmetric distribution (assuming it holds) at the 2nd and 3rd
SD's with the expectation of a QUICK move back to the
PVP or other side of the distribution. It does not make sense to me to take trades at the 1SD with the expectation of a further move away from
PVP in this type of distribution. If you are expecting a
skew to appear...seems it would be better to wait for the
skew then take this type of trade. Now if you are trading for a reversion to the mean at 2nd
SD with the expectation of a move back to
PVP or other side of distribution then risk tolerance doesn't make as much sense to me because the move is going to have to happen quickly because
skew will appear if it stays out there and especially if it starts to move against you out towards the 3rd
SD. Then you are going to have to exit (can't reverse positions in between 2nd and 3rd
SD I wouldn't think. So I would think you would want to use a tight stop not risk tolerance.
Thanks for sharing the information Jerry...very interested in hearing where I am off base,
dbntina