Trading with Market Statistics. IV Standard Deviation

[jperl]

	Quote:	Dogpile
	Jerry, can you explain in a mathematical or logical way why the PVP matters again for your directional bias? are you just saying that the VWAP can be considered the the 'real' point of value and so logic calls for the VWAP to be the 'eventual PVP'?

I don't use Market Profile terminology to describe the Volume Distribution function. Throughout these threads, I have not offered an explanation of why the PVP is where it is or why it moves from point to point. I don't use terms such as "value", or "value area". The fact is, it doesn't matter. I just accept the statistic for what it shows.


The PVP serves two purposes:
1)It acts as a Hold Up Price or HUP for short. A point where the market pauses before continuing on or reversing
2)Along with the VWAP it defines the skew of the market. How much the market deviates from a symmetric distribution.

For a NEWBIE trader, the skew of the market is his lifeblood. He needs to know how skewed the market is before he will enter a trade. And he will only enter a trade in the direction of the skew.

The extent of the skew is defined by the difference between VWAP and PVP
skew = VWAP - PVP
so if the skew is positive NEWBIE takes long trades only
if the skew is negative NEWBIE takes short trades only
and if there is no skew (skew close to 0) no trade

It doesn't get any simpler than this.

Eventually NEWBIE will learn how to take trades against the skew. But for now he needs to understand the basics

	Quote:	Dogpile
	Thus, if PVP is above the VWAP, expectation is for 'next PVP' to be something that is closer to the current VWAP and therefore odds favor the short side? and vice versa... is that right?

This is a Market Profile interpretation, that somehow markets if they are "out of balance" (that is skewed) will somehow move back into balance (market skew = 0).
There is no evidence to support this assertion. And as far as intraday trading is concerned it isn't necessary. A NEWBIE trader simply needs to trade in the direction of the skew and avoid trading when there is no skew.
An Advanced trader can do many other things (Trade against the skew, trade when the skew is 0) but NEWBIE is not ready for that yet.

[Dogpile]

thanks Jerry, I think we are saying the same thing but using different terminology. I interpret what you said to be that newbies expectation is for the market to tend to want to revert towards a symmetric distribution from a skewed distribution. I am not saying has to be perfectly symmetric -- just that skew will change. Therefore Newbie should trade with the expectation that the market will tend to lose whatever the curret skew in the direction of a normal distribution. If this is right, then it is the same thing that I was suggesting but just that I was using different terminology.

[jperl]

	Quote:	Dogpile
	thanks Jerry, I think we are saying the same thing but using different terminology. I interpret what you said to be that newbies expectation is for the market to tend to want to revert towards a symmetric distribution from a skewed distribution.

Actually just the opposite Dogpile. If NEWBIE is trading long (skew > 0) for instance he wants the skew to increase further, not decrease. If he takes a trade at the VWAP, he doesn't want price action to just sit there which would decrease the skew. He wants price action to move away from the VWAP in the direction of larger skew.

[Dogpile]

<<He wants price action to move away from the VWAP in the direction of larger skew.>>

wouldn't a move in the direction he is trading tend to just re-set the skew at a different place. ie, the PVP changes... there is still going to be a skew, just a different skew. this is what happened in the video you just showed, no?

[jperl]

	Quote:	Dogpile
	wouldn't a move in the direction he is trading tend to just re-set the skew at a different place. ie, the PVP changes... there is still going to be a skew, just a different skew. this is what happened in the video you just showed, no?

The skew would reset, only if the market stalled with a build up of volume to move the PVP. It takes a large volume to do this. NEWBIE, being the alert trader that he his would notice this immediately. So if he was in a short trade (negative skew) and the skew reset and turned positive, he would bail out of his short position as shown in the video. What he is hoping for of course is that price action will take the market to the first SD before the skew resets. In either case, he takes money off the table.

[darthtrader]

Jerry, with what you have shown so far I take that you would trade a super strong trend day different? Watching the diamonds today it didnt seem like there would have been a chance for NEWBIE to take a trade with whe he knows so far with how much price was tanking? It was pretty cool to see pvp change though,go below vwap, skew change right basically at the low of the day.

[cooter]

	Quote:	Nick1984
	If you take something like Black-Scholes or the CAPM and figure out the "true" value of an options or futures contract, then the distribution of all other prices around this are simply the errors around the true population mean. These errors then become unexplainable and statistically insignificant.

Failure to account for, or even hedge against these "errors" may be expedient, until you have that "black swan" event that wipes you out! :cry:

[jperl]

	Quote:	darthtradar
	Jerry, with what you have shown so far I take that you would trade a super strong trend day different? Wat