Trading with Market Statistics. IV Standard Deviation

[jperl]

	Quote:	nickm001
	Jerry, I am also confused with "Also each of the terms in the sum should be the same VWAP" statement. Vwap is developing during the day, and is a sum of (pi * vi)/ V. It would seem that SD equitation should have VWAPi and be summed at each bar. So one would get distribution of prices in reference to VWAP line.

Nickm, see the reply above to Dogpile. To compute the variance of a group of numbers, find the average of the numbers and then subtract each number from that average, square each difference and sum them up.

[nickm001]

I think I understand your point.... but it also is not good news from the point of calculating SD, since one has to save values for volume at price ( or whatever unit one will use) for calculating the vi/V element. This makes coding VWAP SD as complex as MP - not a good news for NEWBE:sad:

I have come up with crude approximation of SD, by dropping vi/V factor, and it is remarkably close to your pic for July 23rd for whatever it is worth. See the pic attached

[Dogpile]

nickm,

can I take a look at your code?

personally, I like the comparison to 'bollinger bands' -- bollinger bands do not 'volume weight' each observation. yes, it does matter what volume traded where -- but it can also be argued that 'data outliers' are actually more important when doing statistical analysis -- even if they occur on less volume. but you can argue this either way...

I think unweighted price versus VWAP_H could be a useful indicator...

[jperl]

	Quote:	nickm001
	I have come up with crude approximation of SD, by dropping vi/V factor, and it is remarkably close to your pic for July 23rd for whatever it is worth. See the pic attached

You can if you wish use a frequency distribution function in place of a volume distribution function. The distributions look similar but will differ in the fine details.

[jperl]

	Quote:	Dogpile
	nickm, I think unweighted price versus VWAP_H could be a useful indicator...

If you are going to use unweighted prices to compute SD, then use an unweighted average to compare it too. Be consistent. Don't compare apples to Oranges.

[Dogpile]

<<If you are going to use unweighted prices to compute SD, then use an unweighted average to compare it too. Be consistent. Don't compare apples to Oranges.>>

I already do that with Keltner Channels and Bollinger Bands.

I am looking for 'variation of price' around the point of 'value' (VWAP).... I am not looking for 'variation of volume-weighted price' around the point of value...

[nelo]

Jerry's point is that a 1 point swing from VWAP with 100 contracts is different from 1 point swing from VWAP with 10,000 contracts, during the same time period. So the formula in his first message is correct.

I suspect that treating VWAP as moving average and calculating SD as the difference between VWAP and price as in bollinger bands is incorrect. Though, I do not know how much it differs.

Jerry, one thing just wonders me, why you did not take VWAP[i] in your formula, so Variance = SUMi[Pi(pi - VWAPi)2] ? This would make more sense to me.

[jperl]

	Quote:	nelo
	Jerry, one thing just wonders me, why you did not take VWAP[i] in your formula, so Variance = SUMi[Pi(pi - VWAPi)2] ? This would make more sense to me.

Ok let's give an example of computing variance:

Consider the 5 numbers, 1 2 3 4 5 all of equal weight for simplicity
what is their average: (1+2 + 3 +4 +5)/5 = 3.0
what's the variance: [(1-3.0)^2 + (2-3.0)^2 + (3-3.0)^2 + (4-3.0) ^2 + (5-3.0)^2]/5 = [4.0 +1.0 + 0 + 1.0 + 4.0]/5 = 2.0

Do you notice what value I use for the average in each of the squared terms? It's 3.0.

If I added another number to the series, say 6, then the new average would be (1 + 2 + 3 +4 +5 +6)/6 =3.5
I would then compute the next variance using this average in the squares.

Hope this clears up the computation method

[Dogpile]

ah yes, good point.. too bad that is a computation/coding nightmare...

[Dogpile]

Check this out...

(first note that yes, my code is a bit flawed but I don't think by much since there is little movement here in the VWAP number so the numbers are not far off...)

Look how my std dev bands compress and expand. This shows classic market behavior in that it is oscillating between 'balance' and being 'out of balance' -- a core market profile concept.... (this chart is using rolling 90-minute period for its std dev (45-period chart on a 2-min chart)-- its acting like a bollinger band does -- using rolling data -- but based on VWAP rather than a moving average).

More interesting is look how price breaks lower out of the triangle/balancing and forms a classic 'bear flag' prior to breaking lower. I used to hate coils -- but the VWAP std dev bands show a market that is doing its thing -- coming out of balance then going back into balance -- then coming out again... knowing which environment you are in is crucial.

you can see how the market shot out of the balance with a jolt down (it actually gapped). this was followed by a mini bear-flag which set up excellent location for a short... Yes, I traded this pattern today.

http://bp0.blogger.com/_5h-SWVGx6Ms/...Coil+Break.bmp