Trading with Market Statistics V. Other Entry Points

[jperl]

NEWBIE has come a long way since his early days of using technical analysis. He no longer trades by the seat of his pants. He has a good quantitative feel for market statistics and he simply follows the statistics wherever it wants to take him. He knows that the volume distribution function contains all the information that he will ever need to institute a trade. He knows about the peak volume price, PVP, and can pinpoint that with good precision on his charts. He knows about the distributions average value, the VWAP, and he can follow it as it slowly evolves during the day. He knows about market volatility and he can quantitatively measure it using the standard deviation, SD, of the VWAP. He knows how to determine the market's skew from the difference between the VWAP and the PVP (skew is proportional to VWAP - PVP). He has a simple entry technique, entering at the VWAP in the direction of the skew, a good profit point measured by the SD and a good stoploss point at the PVP.

(As an aside, a discussion of distribution skew, also called kurtosis, can be found at this Wikipedia site. http://en.wikipedia.org/wiki/Skewness
We use the Karl Pearson definition of skew which is (VWAP-PVP)/SD )

But he wants more. He's discovered that trade entries at the VWAP don't occur all that often throughout the day. He knows the market can give more if he just knew where else he could enter a trade beside the VWAP.

NEWBIE is about to have an epiphany.

Suppose he enters a short trade at the VWAP, exits the trade at the 1st SD. Then what does the market do? If it rarely returns to the VWAP, then the only other thing it can do is drop below the 1st SD. Now here is the epiphany.

Another entry point is at the 1st SD itself.

NEWBIE knows this has to be a good entry because the volume distribution function being skewed to the downside, (VWAP-PVP<<0) will remain skewed to the downside only if the price action stays below the VWAP. Only two conditions will change this, a)The market stalls near the 1st SD such that the PVP abruptly changes to near the 1st SD or b)the price action takes the market back up to the VWAP and higher. We will discuss these two conditions in later threads, but first things first. Watch the 31 minute video and see how NEWBIE takes a trade at the 1st SD. Where is his profit target? The volatility is still in force. His profit target can only be one place, the 2nd SD.

YMshortJuly26

NEWBIE is about to have a second epiphany. He's about to learn how he might change losing trades into winners by changing his ideas on stoploss placement. Check out part VI to find out how.

[darthtrader]

congrats newbie

not much to add, I love how your building on each idea in the videos.

one thing, If you were starting over as a trader would you just watch 3 or 4 markets with less correlation (ym, gold/silver, ags) and then only take trades at vwap and 1st std dev? that should give more than enough opportunity I would think?

[darthtrader]

out of curiosity and with something you posted in these threads about stops...if price in that video had actually gone back to the vwap would you have added to your short position if all else stayed the same since probability would have even been more in your favor compared to your entry?

[jperl]

	Quote:	darthtrader
	congrats newbie not much to add, I love how your building on each idea in the videos. one thing, If you were starting over as a trader would you just watch 3 or 4 markets with less correlation (ym, gold/silver, ags) and then only take trades at vwap and 1st std dev? that should give more than enough opportunity I would think?

Yes, for sure. However stay away from anything that does not have high liquidity. Less than 100K contracts/day, and you are hurting for good statistical data.

[jperl]

	Quote:	darthtrader
	out of curiosity and with something you posted in these threads about stops...if price in that video had actually gone back to the vwap would you have added to your short position if all else stayed the same since probability would have even been more in your favor compared to your entry?

You are catching on fast darth. In the next thread I will be discussing scaling-in

[cooter]

	Quote:	jperl
	Yes, for sure. However stay away from anything that does not have high liquidity. Less than 100K contracts/day, and you are hurting for good statistical data.

There are quite a few contracts that trade less than 100K/day, and are still quite volatile and liquid.

[jperl]

	Quote:	cooter
	There are quite a few contracts that trade less than 100K/day, and are still quite volatile and liquid.

Volatile for sure, but you don't want to be trading anything with large spreads .
So cooter how about giving us a list that you consider liquid and I will take a look at the volume distribution function.

[cooter]

Sure, but define "large spreads" :p

For example, try the CBOT grains:

Dec Corn
Sept Wheat
Nov Beans

There's more than enough action here to make a decent living, IMHO.

[houghton]

Hello Everyone,

My first post after spending nearly two months absorbing all the information available on this site. Let me first congratulate the many contributors who do so in a professional non-rancorous manner. It is truly refreshing.

I have two questions regarding this thread. First, is there a TradeStation eld for plotting the PVP? Second, has the method for calculating/plotting the SD for VWAP been settled?

Thanks,
Karl

[thrunner]

Thank you Jerry for the summer lessons I came back from vacation found that you have really done some interesting work. My question for this video is you said "there is no reason why it {target} shouldn't hit the 2nd standard deviation, the volatility of the market says it should". How exactly are you calculating this? It seems to newbie and me that 95% of the prices have occurred within SD2, so going beyond 95% is not a high probability trade. Are you basing this on skewness calculation? (eg, higher the skewness, the greater probability of exceeding SD2). Is there a skewness risk involve in this trade? http://en.wikipedia.org/wiki/Skewness_risk