What is DEMAND/SUPPLY volume?

[jperl]

This thread is started as a result of a short discussion by Tasuki in the Volume Spread Analysis posts 982 and 991 to quantify the concepts of DEMAND and SUPPLY volume. The problem arises on how to define DEMAND volume and SUPPLY volume. Some traders define trades made at the ask as DEMAND volume, trades made at the bid as SUPPLY volume. Other traders would say volume should be considered DEMAND only if there is an uptick in price and SUPPLY only if there is a down tick in price. If price does not change, then that trade is taken to be DEMAND volume if the last time price changed was an up tick and SUPPLY volume if the last time price changed was a down tick.

The former definition is used by Mister Ed in the following quote from the VSA thread

	Quote:	mister ed
	Let’s say there is a sequence thus: 1. Bid = 25 2. Ask = 50 3. Trade at 50 for 75 lots. (This is an aggressive buy – reported as a buy) 4. Bid is now 50 5. Ask = 75 6. Trade at 50 for 30 lots. (This is an aggressive sell – reported as a sell).

In that series of trades, trade 3 would be DEMAND volume of 75 lots because it occurred at the ask and trade 6 would be SUPPLY volume of 30 lots because it occurred at the bid.

For the alternative definition of DEMAND/SUPPLY (which I prefer) consider the following series of trades
1.Bid =25,Ask=50, trade at 25 for 25 lots
2 Bid=25,Ask=50, trade at 50 for 75 lots
3.Bid changes to 50, Ask changes to 75, trade at 50 for 30 lots

In this scenario, trade 2 would be DEMAND volume of 75 lots because there was an uptick from trade 1 from 25 to 50.
Trade 3 would also be DEMAND volume of 30 lots (even though it occurred at the bid at the same price as trade 2) because the last price change was an up tick(trade 2 after trade 1).
This is not a small difference in definition and is crucial for quantifying many of the ideas in VSA.
This thread is now open for discussion.

[mister ed]

	Quote:	jperl
	This thread is started as a result of a short discussion by Tasuki in the Volume Spread Analysis posts 982 and 991 to quantify the concepts of DEMAND and SUPPLY volume. The problem arises on how to define DEMAND volume and SUPPLY volume. Some traders define trades made at the ask as DEMAND volume, trades made at the bid as SUPPLY volume. Other traders would say volume should be considered DEMAND only if there is an uptick in price and SUPPLY only if there is a down tick in price. If price does not change, then that trade is taken to be DEMAND volume if the last time price changed was an up tick and SUPPLY volume if the last time price changed was a down tick. The former definition is used by Mister Ed in the following quote from the VSA thread In that series of trades, trade 3 would be DEMAND volume of 75 lots because it occurred at the ask and trade 6 would be SUPPLY volume of 30 lots because it occurred at the bid. For the alternative definition of DEMAND/SUPPLY (which I prefer) consider the following series of trades 1.Bid =25,Ask=50, trade at 25 for 25 lots 2 Bid=25,Ask=50, trade at 50 for 75 lots 3.Bid changes to 50, Ask changes to 75, trade at 50 for 30 lots In this scenario, trade 2 would be DEMAND volume of 75 lots because there was an uptick from trade 1 from 25 to 50. Trade 3 would also be DEMAND volume of 30 lots (even though it occurred at the bid at the same price as trade 2) because the last price change was an up tick(trade 2 after trade 1). This is not a small difference in definition and is crucial for quantifying many of the ideas in VSA. This thread is now open for discussion.

New thread! OK.

Just to reiterate Jerry - yes we are in complete disagreement about our definitions

[mister ed]

By the way Jerry, and all, this thread should not be limited to just discussing the definition of bid / ask or Demand / Supply volume - I hope we can find more to discuss than just the definition.

But while we are on that subject I think it would be worthwhile finding out what definition is used in TradeStation, it is a popular package and be good to know.

[BlowFish]

	Quote:	mister ed
	3. I have an issue with smart = big. Observation of the big-lot trades that go through suggests to me that the big lot traders are not necessarily “smart”. It is logical that smart = big, but in my experience, not all big = smart. This may be an issue with how the data is presented, and I would love input on this. I am only speaking of the ES, my current understanding is that a 100 lot buy (i.e. a buyer who hits the ask for 100) is reported as a 100 lot buy even if he buys from a split of sellers, say a 5, 10, 15, 10, 30, 20, 10). Another point is the software exists to allow trade size to be split, so instead of executing one lot of 200 near-simultaneous execution of 4 lots of 50 (for arguments sake) can be done instead. My broker even offers a humble trader like me an “iceberg” facility to split up my limit orders.

Glad you agreed with most of my post . This was a bit sloppy on my part. VSA tends to use 'smart money' as a type of catch all for the guys that are privy to stuff we dont know, it is kind of implied that they also have the guys that take massive positions. Really there is just a right side and a wrong side in the timeframe you trade!! As I mention now and then the commitment of traders report would indicate The % winners and losers don't really vary that much amongst the various market participants. In a nutshell I agree the big guys loose too. The way I see it (which maybe a bit different to the pure VSA view) is that there is 'smart money' that knows stuff we don't or simply has there own agenda. They are probably 'large'. Where I agree with you and perhaps stray from the pure VSA view is there are also a whole bunch of 'dumb' participants trading size too. Anyway I digress.

The thing you introduce is the other piece of information that we can use as traders. That is the order book. Basically its inventory the participants choose to advertise. Incidentally I think this is another area where people tend to use intuition and get it wrong. If you watch the order book price tends to move towards size not away from it. In fact the old timers say 'size trades to size'.

I think probably one of the key thing is how the advertised inventory (order book) reacts to the aggressive sellers. I have noticed a few things but I find it quite tricky sometimes. As yet I have never discovered a tape reader that can really explain it!

Anyway I hope we can get some practical application out of this stuff as it is unique market generated data.

Cheers

[jperl]

For those of you who use Investor R/T software, you have a choice on how you break down volume, the Mister Ed version (bid/ask) or my version (uptick/downtick). Here is a quote from their site:

http://www.linnsoft.com/new/index86.html
The Volume Breakdown Indicator (VB) has been enhanced with an option to divide up volume by "Up Tick vs Down Tick Volume". In the past, volume was always broken down between Ask Traded and Bid Traded volume. Now, the user has a choice of dividing up Buy and Sell volume as either "Ask Traded vs Bid Traded Volume" or "Up Tick vs Down Tick Volume. When "Up Tick vs Down Tick Volume" is specified, each trade that occurs on or after an uptick is placed in the buy volume category, while any trade that occurs on or after a downtick is considered in the sell volume category.

[monad]

	Quote:	jperl
	For those of you who use Investor R/T software, you have a choice on how you break down volume, the Mister Ed version (bid/ask) or my version (uptick/downtick). Here is a quote from their site: http://www.linnsoft.com/new/index86.html The Volume Breakdown Indicator (VB) has been enhanced with an option to divide up volume by "Up Tick vs Down Tick Volume". In the past, volume was always broken down between Ask Traded and Bid Traded volume. Now, the user has a choice of dividing up Buy and Sell volume as either "Ask Traded vs Bid Traded Volume" or "Up Tick vs Down Tick Volume. When "Up Tick vs Down Tick Volume" is specified, each trade that occurs on or after an uptick is placed in the buy volume category, while any trade that occurs on or after a downtick is considered in the sell volume category.

As I have mentioned on the VSA thread, the most productive way forward is to illustrate these issues via observations on a chart with some realtime trades and get them posted so that all can benefit, who knows Sebastian and Co may decide to incorporate in their analysis and in any charting software they may be developing.

[mister ed]

Well, new thread and already I am learning! Jerry - thanks for the tip re option in IR/T - I will compare our two definitions and see the pros & cons for each.

BF and Monad - past bedtime here, will go through posts more thoroughly when fully awake...

[BlowFish]

	Quote:	jperl
	For those of you who use Investor R/T software, you have a choice on how you break down volume, the Mister Ed version (bid/ask) or my version (uptick/downtick). Here is a quote from their site: http://www.linnsoft.com/new/index86.html The Volume Breakdown Indicator (VB) has been enhanced with an option to divide up volume by "Up Tick vs Down Tick Volume". In the past, volume was always broken down between Ask Traded and Bid Traded volume. Now, the user has a choice of dividing up Buy and Sell volume as either "Ask Traded vs Bid Traded Volume" or "Up Tick vs Down Tick Volume. When "Up Tick vs Down Tick Volume" is specified, each trade that occurs on or after an uptick is placed in the buy volume category, while any trade that occurs on or after a downtick is considered in the sell volume category.

Hi Jerry,

I have looked at both and uptick/downtick looks like a good 'proxy' for volume at bid/ask. While not identical they look very similar.

If you think about it price is likely to tick up to the ask and down to the bid. Of course you do get cases where this is not the case but on the whole the two look very similar. Tradestation offers this uptick downtick natively though there are indicators available to do @bid @ask.

Cheers.

P.S. I cant post charts right now as they only accumulate the volume corectly in real time.

[jperl]

And for those of you who use TradeStation, according to epiktetos at post 12637 the following is the info about upticks vs down ticks:

"TS uses the following rules when assigning a tick to the reserved word UpTicks:An uptick is a tick whose price is higher than that of the previous tick of a different price. Thus, if tick 1 occurs at a given price, tick 2 occurs at a higher price, and tick 3 occurs at the same price as tick 2, both tick 2 and tick 3 are counted as upticks."

[mister ed]

BF – interesting points about the “smart money” you make “that knows stuff we don't or simply has there own agenda” – yes agree with you on both. I also think there is less of it than perhaps we assume. I have heard figures bandied around that 85% of activity is related to smart money, the figures and definitions are vague (at least to my understanding) but I can’t think that number is anywhere near accurate.

It is important to differentiate between size and smart – there is plenty of big lots traders bumping up against big lot traders activity, and one, at least, has to be on the wrong side. The point you make about sometimes they just have their own agenda is true, in MP you would refer to it as the other timeframe trader I believe, and a lot of the time their activity in the smaller timeframe is not at all “smart” – “just get me set” would seem to be a better description of their activity sometimes.

Now the order book – trade towards size is very accurate. I have heard two good, plausible explanations. One is that if the price is moving up towards large offers it is because there is no point sticking in a limit bid and waiting to get set, the price is moving up so may as well pay the offer and get in, the reason there are large offers sitting there is because in an up move the sellers can afford to sit on the offer and wait, hence the market moves towards size. Sounds plausible. The other explanation I have heard is “herding the sheep”. Stick in big offers just above market to spoof it while getting filled on the bid with iceberg limit buys. Must be one of the few instances in the business world where stuff is advertised for sale with no intention of actually selling it. This second explanation is my preferred model.

It is very interesting when this herding is occurring. I am not much of a watcher of DOM beyond when I am executing my own orders, most of the time I am watching my charts instead. But there are times when the nature of the trade changes, it is hard to explain but the range/volatility contracts while volumes remain reasonably strong. Sure enough I will flick over to DOM and there they are, offers in the thousands just above the market offer. As the market ticks higher so do these large offers, close but tantalizingly out of reach! Call me a cynic, but worth a look.

-------

I am still pondering on the 2 definitions slugging it out at present. Each definition will give a unique view of the market activity – the two are going to be very similar overall but at times will be distinctly different, and I think these differences will be at key points. I think its all in the way the price reacts to what is going on, as always. I am yet to go through some playback charts and look at these differences but on the brief look I have had I have a sneaking suspicion that my conclusion is going to be that both definitions offer valuable insights and maybe there is a role for using both. Anyone else doing the same thing, be good to hear other input.