Trading with Market Statistics VII. Breakout Trades at the PVP

[jperl]

We are now in a position to discuss trading aspects at points in the volume distribution function near the PVP.

WARNING!! This is not for new traders. If you have not read and understood threads I,II,III, IV, V, and VI, and practiced with entries, exits and scale-ins using simulation mode until you are comfortable, then entries described in this thread are not for you (click on the thread numbers to see them). This is a dangerous place to be entering a trade. Anything and everything can happen and you can be caught with your pants down.

You are probably asking, why is JERRY telling me about this place to trade if it is so dangerous? Two reasons. If you are a basic trader taking entries at the VWAP and 1st SD, you might find yourself caught in this trap and not know what to do.
Secondly, if you like excitement and like living on the edge, like the bikers in the first attachment (a picture I found on the internet), and if you have a correct entry, there are lots of bucks you can pull out of the market by trading here.

So what's this all about? Well it has to do with price action at and around the PVP. The PVP as you've learned in part I, is the dividing line between the low volume zone and the high volume zone. All of the trades we have discussed so far have been in the direction of the skew at the VWAP or its 1st SD in the high volume zone. When price action is around the PVP, it's decision time for the market. The market has to either move back into the high volume zone and continue trading there, or look for new territory in the low volume zone. Thus like the bike riders in the picture, you as a trader will be riding a fine line between the safety of the high volume zone, and the sudden fall into the abyss.

How does price action end up at the PVP anyway. There are only two ways: a)the PVP suddenly jumps to where the price action is or b) Price moves there. In either case, if you are in a trade, you are going to want to know what to do. If you are not in a trade, but want and exhilarating experience, here's your chance to do or die.

In case a) the skew suddenly flips its sign from positive to negative or vice versa. (Remember the skew is proportional to VWAP - PVP). While skew flips can occur anytime during the day, they usually occur early in the trading day when the volume distribution is beginning to form. Sometimes this is a sign of an imminent reversal. What should you do if you are in a trade and find yourself in this situation? Simple answer: GET OUT!, Dump the trade, win, lose or draw.


When price action is near the PVP, price is sandwiched between the VWAP and an SD or betwen 2 SD's. You might notice that price will tend to oscillate back and forth for a while between the VWAP and the SD, across the PVP line or oscillate between the 2 SD's. The market is thinking. Do I want to go back to the safety of the high volume zone where most of the trading has taken place or am I adventurous and want to discover new territory in the abyss of low volume. Don't trade in this region unless you are a scalper. Just wait. Wait for the market to decide what it wants to do, before you decide what you will do.

In the first video, we see price action in the PVP area with the VWAP on the downside. The Video shows when to take a trade to the upside on the break out of the 1st SD.

YM BREAKOUT TRADE

In the second video, we again see price action in the PVP area, but this time price breaks through the VWAP. We show how to apply the Shapiro Effect discussed in post 16541 to enter the trade.

YMVWAP WITH SHAPIRO EFFECT TRADE

And finally in the third video, we show a skew flip, where the PVP suddenly jumps to the price action. A trader may have taken a trade just before the flip as shown in the video and exited before the flip occurred, but if he didn't he should exit at the flip price.

ESSKEW FLIP

Regardless of whether price action has moved to the PVP or the PVP has moved to the price action, the effect is the same. You are now looking at a zone where trade entry is precarious, so be cautious.

In the next thread Part VIII, we will discuss what to do when the skew is close to or equal to zero and the volume distribution function is symmetric.

[BlowFish]

I haven't digested this properly yet Jerry, but just wanted to say hurrah hoping that it will answer some of the questions I raised in the previous thread.

Cheers,

[Dogpile]

Jerry,

seems to me that each contract has its own nuances relative to VWAP. for example, the S&P futures really seem to react as you would expect around the VWAP price -- generally finds support or resistance there -- unless its a strong move -- whereas other contracts (NQ/YM) seem to violate the VWAP without the same regard for it. has this been something you have noticed?

[jperl]

	Quote:	Dogpile
	Jerry, seems to me that each contract has its own nuances relative to VWAP. for example, the S&P futures really seem to react as you would expect around the VWAP price -- generally finds support or resistance there -- unless its a strong move -- whereas other contracts (NQ/YM) seem to violate the VWAP without the same regard for it. has this been something you have noticed?

I haven't investigated this in any detail Dogpile, but my feeling is that the nature of the instrument your trading shouldn't matter that much. As long as the statistics are valid, any violations of the VWAP or SD should occur in a random fashion. Use of the Shaprio Effect should help find those.

[darthtrader]

Haha, the cliffs of moher image. Those guys look like they are out in full force to try to win a darwin award.
keep it coming. Great examples for the Shaprio Effect. I didn't get your text explanation but those videos made total sense. Seems like a great way to have a little system to make sure to get in on a retrace.

[johnbain]

Just found this thread. Fascinating stuff - kudos to jperl for the clear and cogent lessons!

[jperl]

	Quote:	johnbain
	Just found this thread. Fascinating stuff - kudos to jperl for the clear and cogent lessons!

Glad you like them John. Hope they help you in your trading

[O66]

1 valid short on the russel today. (setups i know)
Vwap seems to slow for russel and is most of the day above vpv

[Nvesta81]

When using Shapiro Effect trading with the skew, how often have you seen prices breakout against the skew and stop you out, and how much wiggle room should one allow the market to have before you bail? I know in previous threads you mentioned a %2 risk of your account balance, which makes sense. So let's say I enter at VWAP retest, put a 100 point stop, and prices go against me back to PVP, this would be a very scary thing...

I also assume that when prices do go your way, you immediately place a break-even stop when you're up 10-20 ticks? I know this system is difficult to back-test so I'm just curious to know what kind of stats you have accumulated using this method... I'm wondering if a 100 point stop gives the market enough room to revert back in the direction of the skew if I were unfortunate enough to get caught in a break-out... but at that point you wonder if the trade was good to begin with, very hard on the nerves I imagine... at that point discretion comes into play would you say?

Great threads, keep em coming!

[jperl]

	Quote:	Nvesta81
	When using Shapiro Effect trading with the skew, how often have you seen prices breakout against the skew and stop you out, and how much wiggle room should one allow the market to have before you bail?

If you are afraid of using risk tolerance as a trading philosophy, then you need to have a nearby hard stop for your trade. If you entered short using the Shapiro Effect, then you entered below the low of a nearby up bar. Set the stop 1 tick above the high of that bar. Simlarly for longs.

	Quote:	Nvesta81
	I know in previous threads you mentioned a %2 risk of your account balance, which makes sense. So let's say I enter at VWAP retest, put a 100 point stop, and prices go against me back to PVP, this would be a very scary thing...

If that's your risk tolerance, then by definition you are comfortable with it. If you are not comfortable with it, then you need to redefine a different risk tolerance.

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