Trading with Market Statistics VI. Scaling In and Risk Tolerance

[BlowFish]

This chart beautifully illustrates the behaviour that I was talking about (and trying to ensure I understood) a few posts back. This mornings DAX again.

From the session open it just dropped with no base to build any sort of volume for the PvP. Volume increased on the fall and so PvP led the Vwap the whole way down. Now according to Newbies (ok my) understanding of things so far, the skew is up technically so Newbie and even Trader would stand aside. But, having watched this behaviour for a couple of days in a strong down push they are wondering if Advanced Trader might be taking some other action?

At least they remember 'when in doubt stay out' and don't trade against the Skew.There patience is rewarded with a text book trade (shown on the chart). However they resolve to find out a little more about this phenomenon in a strongly trending market.

Cheers!!

[Blu-Ray]

Nice analysis there Blowfish, it looks like you've got that PVP pretty much nailed.

Blu-Ray

[Dogpile]

Blowfish, I don't know the mechanics of the european markets because they are strongly affected by the US market but here in US, a large opening gap changes the dynamics of the morning session.

Gaps here in the S&P futures tend to fill at least partially. Given this tendency, the initial play is generally to fade the gap for a trade and then see how market responds and go back with a trade in the direction of the gap once the market has pushed into the gap. You can see this dynamic play out on the DAX at the open. Think about it, the market wants to screw those who panic with 'bad marks' to open it too low allowing nimble players to buy into the panic and take a ride back up before the institutional players enter the market (institutions generally trade in afternoon -- which often creates 'afternoon trendiness' versus morning '2-way action').

General rule is that the morning session will often see a flush to force people who haven't yet panicked to panic. This will often set a high or low for the day in first few hours of trading- thus the PVP/VWAP will not be so relevant for the opening 30 mins+... then gets more relevant as the distribution fills out.

my point is just that the morning and afternoon sessions tend to be fundamentally different.

[BlowFish]

Hi Dog,

There's the thing - there was no gap to speak of yesterday! (chart a page or so back). Good observation for today however. The DAX is open now for the full European and US (main) sessions. Personally I think gaps occur in index futures for a couple of reasons. For example if there is key global economic news and if that happens when a market is shut (or in its overnight electronic session) when it opens it is gonna open more in line with its overseas counterparts. There is key news before the US opens (even US news) and that moves markets (or gives an excuse for them to be moved around!). And as you say it is the best time to jerk around the un informed investor especially if they have market on open orders to be exploited!

To be honest I am more interested in the characteristics of the PvP in certain situations (like the one I mentioned) rather than the fundamental 'macro' stuff that caused them (those conditions). For example if you get a strong directional day (whatever the cause) you are not going to have much basing action to build a solid PvP. The basing could have occurred one or more days before. Incidentally as the PvP starts anew each day it is gap neutral.

Cheers.

[jperl]

	Quote:	BlowFish
	From the session open it just dropped with no base to build any sort of volume for the PvP. Volume increased on the fall and so PvP led the Vwap the whole way down. Now according to Newbies (ok my) understanding of things so far, the skew is up technically so Newbie and even Trader would stand aside. But, having watched this behaviour for a couple of days in a strong down push they are wondering if Advanced Trader might be taking some other action?

Ok, now I understand what you are referring too. When the market is near the PVP, a trade against the skew is possible by an advanced trader. It's called a break-out trade which we discuss in the next thread coming up.

[jperl]

	Quote:	cooter
	Yep. That's what I was looking for - thxs Jerry. Note the pullback at that point.

Here is another one that touched the 3rd SD Cooter. NQ touched, but continued on down.

[cooter]

Did it not revert back to the mean?

[O66]

wasnt easy today
in the afternoon we had vwap below pvp but price action above. Shorts didnt work.

[jperl]

	Quote:	cooter
	Did it not revert back to the mean?

Eventually it did, but would you hang on that long.

[jperl]

	Quote:	O66
	wasnt easy today in the afternoon we had vwap below pvp but price action above. Shorts didnt work.

Yes, today was a day for breakout trades against the skew. We haven't discussed that yet. Coming up next.